“American exceptionalism” has meant different things at different points in time. At heart, the belief that there’s something distinct and unique about America goes back hundreds of years, arguably to the Puritans of the Massachusetts colony who believed their “city upon a hill” was a kind of model society for the world. This concept was revived throughout the years, notably by President Ronald Reagan in the 1980s as he, along with Margaret Thatcher, advanced a distinctive version of “free market capitalism.” The remarkable performance of U.S. stock markets coming out of the pandemic has been a striking example where America really has been exceptional, far outperforming the rest of the world in the 2020s.
Both of these are under threat as a result of President Trump’s escalating efforts to bring the Federal Reserve under his direct control, according to a new warning from investment bank Piper Sandler. “The U.S. is moving away from free markets, limited government, and the rule of law at an astonishing pace,” the bank writes, taking aim at a range of actors beyond the president to indict a complacent Congress and even markets themselves. “We are watching the pillars of the long bull market being removed one by one,” the bank warns, adding that the crisis goes far beyond Trump’s unprecedented attempt to fire a Fed governor.
The note by the investment bank came just days after the Trump administration took an unprecedented 9.9% stake in semiconductor powerhouse Intel, netting a $1.9 billion paper gain within a few days for its troubles. Weeks earlier, Trump had negotiated a similarly unprecedented deal with Nvidia and AMD, in which the government would take a 15% cut of the companies’ sales of certain chips into the Chinese market. Erik Jensen, a law professor at Case Western Reserve University, told Fortune at the time that he was not aware of any similar deal in corporate history.
Although Piper Sandler did not say so explicitly, the bank took aim at American markets’ string of all-time highs, essentially warning that they will not ride to the rescue. “We do not share the investor conceit that the markets regularly ‘discipline’ politicians,” the bank notes, warning that “bond vigilantes” will not save America from the developing problem. It also argues that the crisis for the American economy goes far beyond the attempted firing of one Fed member, or central bank independence.
Uncharted waters
To start with the Fed, Piper Sandler notes that Trump has made explicit that he believes monetary policy should be his to shape, dismissing the principle of an independent Fed led by nonpartisan economists. His late-night attempt to fire Federal Reserve governor Lisa Cook—citing obscure allegations of mortgage fraud—has now forced the courts into uncharted territory, testing whether a president can legally purge central bank officials who resist him.
Trump tangled with the Fed during his first term as well, often taking issue with the actions of his own appointee, Jerome Powell. “I’m not even a little bit happy with my selection of Jay,” Trump said in November 2018, just a year after nominating Powell as Fed chair. Ultimately, Powell did what Trump was pressuring him to do—while signalling it was an independent decision—even as Trump railed on him and other Fed governors as “boneheads.”
The president can only fire a member of the board for cause, and the mortgage fraud accusations against Cook may or may not rise to this level. The Supreme Court wrote in an opinion issued in May that the Fed is different in nature from other independent agencies, the bank said. At this point, it’s unclear whether Trump can in fact fire Cook or whether she will remain in her role while her fate is decided. Still, Piper concludes that “the judiciary is no match for Trump’s broader assault on the Fed. If the president is determined to politicize the Fed and Congress won’t stand in the way, then it is going to happen.”
While these are uncharted waters for America, they are not for countries under authoritarian regimes, even ones previously devoted to free markets and democracy. Piper Sandler does not draw any comparisons, but the recent example of Turkey is salient, where President Recep Tayyip Erdogan has pursued low interest rates against rising inflation, fired central bankers who disagreed, and appointed himself the head of a sovereign wealth fund.
Markets’ repeated failures
For all of the Trump theater, markets’ outsize returns suggest that business as usual is still taking place. Consider Nouriel Roubini, the often gloomy prognosticator sometimes known as Dr. Doom, who has been uncharacteristically optimistic in recent years. For instance, he tweeted in April that the tech sector is dynamic enough to overcome these issues: “Tech trumps tariffs even if Mickey Mouse or a clown were to run the U.S.! It doesn’t matter, and American exceptionalism will remain and be resilient regardless of Trump given the hyper-dynamism and innovations of the U.S. private sector.”
Earlier today, Jay Hatfield of Infrastructure Capital Advisors told Fortune’s Eva Roytburg: “This is very positive.” He added that he was in favor of Trump’s moves on the Fed: “The simple way to say it is that eliminating Fed incompetence is far more important than defending alleged Fed independence. The Fed has always been political; it’s only Trump who talks about it in public.”
Markets have not acted as a restraint on Trump in terms of trade, Piper Sandler argues, noting that “more than 70% of what Trump promised on Liberation Day has come to fruition.” Furthermore, it notes that Trump is doubling down, threatening just last night to impose tariffs in response to digital services taxes.
Markets’ recent rally at the prospect of rate cuts is nothing to be celebrated, Piper Sandler says, as these cuts have come from political pressure. Piper then recalls how markets were remarkably inefficient and unhelpful during capitalism’s greatest test since the Great Depression. “It didn’t see the housing bust and Great Financial Crisis coming. We find little evidence the market is forward-looking or disciplines policymakers.”
Congress’s role
Meanwhile, Congress shows little inclination to resist. Few of Trump’s Fed nominees have been rejected by the Senate, despite mounting concerns over their independence. Republicans, wary of crossing Trump, have largely waved through even controversial picks. Stephen Miran is expected to be confirmed as soon as next month—and should Powell step aside when his term as chair expires, Trump will almost certainly get his preferred replacement.
Perhaps most rattling for Wall Street, Piper Sandler positioned Trump’s Fed fight as merely one piece of a broader dismantling of the economic framework underpinning the long expansion of recent decades. The bank argues that “decades of freer trade [have] been dramatically reversed overnight.” It sees “the sound money pillar” as being fundamentally compromised by Trump’s assault on the Fed, among other things.
[This report has been updated to include additional context.]
For this story, Fortune used generative AI to help with an initial draft. An editor verified the accuracy of the information before publishing.
