US: Two Risks to Watch That Could Lead to Volatility

• In a July 11, 2025 research article by Fitch BMI, there are two risks that could result in an increase in volatility. First, is the escalation in trade tensions as the US administration raises the tariff rate for certain economies. Secondly, the US administration is increasing pressure on Federal Reserve Chair Jerome Powell, which could make markets uneasy.
• Regarding trade tensions, while the extension of the July 9 deadline to August 1 provides more time for negotiations, U.S. President Donald Trump has simultaneously raised tariff rates for several economies, leading to greater uncertainty. Trump might feel emboldened to raise tariffs given that inflation has thus far remained well anchored, the labour market is holding steady, and equity markets hit new highs. However, it is believed that such a strategy would pose significant downside risks to US and global growth.
• Companies may start to see higher inventory costs as their front-loaded inventory is depleted, and they start to rebuild inventory at higher costs.  This could feed into higher prices if they pass on the additional cost, or higher unemployment if they are unable to do so, and this could mean tighter margins. Additionally, markets do not seem to be pricing in a significant escalation in tensions, which could lead to another sharp rise in equity and bond market volatility. Notably, compared with April, the economy is in a weaker position to absorb another shock.
• Meanwhile, the U.S. administration is also increasing pressure on Federal Reserve Chair Jerome Powell, which could make markets uneasy. The Financial Times reported that the White House has accused Jerome Powell of 'grossly’ mismanaging the refurbishment of the Federal Reserve’s headquarters, and has come under attack from various Republican members of Congress.
• If the market interprets this as a potential avenue for the administration to relieve Powell of his duties, or if this results in the decision by Powell to step down, this could lead to a significant rise in financial market volatility. For now, it is believed that Powell will remain as Chair until his term ends in May 2026, and betting markets only assign a 12% probability that he is removed from his post, but any risk to this could lead to economic uncertainty and a rise in financial market volatility.

(Source: Fitch Connect)