As U.S.-China trade tensions escalate, Federal Reserve Chairman Powell's latest remarks have sent shockwaves through the market. Facing the Trump administration's largest tariff action in 200 years, Powell unusually emphasized that inflation risks are "not a temporary phenomenon" and warned that the economic outlook is "extremely uncertain". The Fed will pause its actions and patiently wait for more data. This move not only reflects a shift towards a wait-and-see monetary policy but also introduces uncertainty into the global asset markets.
Warning: Inflation Risk May Become Persistent
At the American Business Editors and Writers Association annual meeting, Powell stated that the new round of tariffs will significantly increase import costs, driving up consumer prices and potentially evolving into "persistent inflation". Although the Fed previously assessed the tariff effects as a "temporary impact", Powell's shift in attitude is seen as a major redefinition of inflation risks. He noted:
Tariffs are highly likely to trigger at least a temporary inflation increase, but these effects may also be lasting.
According to Bloomberg economists, the tariff policy announced by Trump and effective from April will raise the average U.S. effective tariff rate from 2.3% to 22%, even exceeding the 1930 Smoot-Hawley Tariff Act. JPMorgan predicts this will increase the probability of a global recession to 60%, with many institutions believing that prices could rise significantly this year, especially for automotive products.
Will Remain Patient and Wait for More Data
Powell pointed out that the Fed's greatest current challenge is balancing inflation suppression and employment maintenance. The price increases and consumer pressures triggered by tariffs create potential conflicts between these two objectives, significantly increasing decision-making difficulty.
Market analysts warn that without additional policy support, it could replay the "stagflation" scenario of the 1970s, where economic stagnation, soaring prices, and worsening unemployment occur simultaneously. However, Powell still believes the U.S. economy is "generally in good condition", and although uncertainty has increased, no substantial deterioration has been observed.
Facing market expectations of up to four rate cuts this year, Powell emphasized "more time is needed to observe", and the Fed will not rashly adjust policies before the concrete impacts on inflation and economic growth become clear. He stated:
We will remain patient and wait for more definitive data before considering any monetary policy adjustments.
This statement indicates that the Fed is inclined to maintain a wait-and-see stance in the short term, further intensifying market focus on the potential policy turning point.
Trump Calls for Quick Rate Cut
Notably, before Powell's public statement, Trump posted on Truth Social "pointing and pressuring", demanding Powell to "cut rates quickly and stop playing politics", emphasizing that energy and food prices have significantly declined, and employment data is strong, making it the "perfect time for a rate cut".
Now is a perfect moment for Federal Reserve Chairman Jerome Powell to cut rates. He's always "a step behind", but he can now change his image, and do so quickly. Energy prices are down, interest rates are down, inflation is down, egg prices have even dropped 69%, and employment has risen in the past two months - this is a huge victory for America. Cut rates, Jerome, and stop playing politics!
Trump advocates using rate cuts combined with tariffs to revive the economy, but Powell believes inflation expectations still carry upward risks and require careful assessment. This verbal confrontation highlights the fundamental differences in their economic risk assessments and puts political intervention pressure on the Fed's monetary policy.
Powell's Preferred Recession Indicator Dramatically Deteriorates
According to Reuters, Powell's preferred economic recession prediction indicator - the yield spread between three-month and eighteen-month U.S. Treasury bonds - fell to -113 basis points this week, a new low since October 2024, and experienced the largest single-day deterioration since 2008.
This indicator reflects the gap between short-term rates and market expectations of future rates, typically narrowing and turning negative as economic recession approaches. Since the Fed started its rate hike cycle in March 2022, this indicator has long been in negative territory due to high short-term bond yields.
Mizuho strategy head Jordan Rochester noted: "Historically, the Fed often enters a recession period 3 to 18 months after its last rate hike. Now, 21 months have passed, and the market must start seriously considering whether a recession has quietly arrived."
With "stagflation + recession" risks increasing, market sentiment has rapidly turned negative. The Dow Jones index plummeted over 2,000 points, the Nasdaq fell 7%, U.S. bond yields dropped below 4%, and oil prices fell to a four-year low due to expected demand decline.
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