Author: Zheng Yao
Tonight, all eyes will be on Federal Reserve Chairman Powell. He will attend the Chicago Economic Club event and deliver a speech at 1:30 AM Beijing time on April 17th. Global investors, analysts, and market participants are waiting for Powell's response to recent economic developments.
Interestingly, Powell's speech venue is the same place where Trump visited in October 2024 and discussed high tariffs and the replacement of the Federal Reserve Chairman. Although the United States has temporarily suspended tariffs on over 75 countries for 90 days, the overall economic outlook remains uncertain, and market concerns about a U.S. recession are intensifying.
Powell's speech today will undoubtedly provide crucial insights into the current economic situation, tariff impacts, and interest rate trends for 2025. The market will focus on three key questions:
Facing Trump's tariff policies and White House "leadership change" pressure, how will the Federal Reserve maintain its tradition of independent decision-making?
With inflation declining but recession risks increasing, will Powell's rate cut expectations change?
As the internal "hawk-dove debate" at the Federal Reserve intensifies, will Waller and other officials' aggressive rate cut proposals influence the decision?
In previous speeches, Powell stated that Trump's tariff increases far exceeded the Federal Reserve's expectations and may have a greater impact on the economy than anticipated. Therefore, he believes that recent policy impacts have high uncertainty, and he will wait for more clarity before making further adjustments. He also emphasized that the current policy stance is good, allowing for a wait-and-see approach, with the policy still maintaining moderate restrictiveness. Regarding the possibility of an economic recession, he noted that the Federal Reserve has not made probability predictions, but external forecasting institutions have increased their estimates. On rate cut expectations, Powell has not changed his view from the March meeting, believing that weak economic growth and rising inflation will offset each other, maintaining the expectation of two rate cuts in 2025.
Powell is facing "rate cut" pressure from multiple fronts. U.S. inflation seems to be gradually declining. The latest March CPI data shows a further downward trend in inflation. Meanwhile, Trump has consistently supported low-interest-rate policies, which now create trouble for Powell. Rapid and significant rate cuts could reignite inflation, but delaying rate cuts might drag down the U.S. economy.
Powell and most Federal Reserve officials currently believe that now is not the appropriate time for rate cuts. Although the U.S. economy is showing signs of weakness, especially in the job market, the Federal Reserve seems inclined to maintain stable policy rates to prevent a new round of inflation from Trump's tariffs. The Federal Reserve's March meeting minutes suggest that its economic forecasts and dot plot imply two possible rate cuts in 2025.
However, Trump's tariff policies not only increase the risk of a U.S. recession but may also force the Federal Reserve to implement more aggressive rate cuts. Meanwhile, market performance remains sluggish, reflecting that previous expectations of a Federal Reserve policy shift towards easing have not translated into a substantial rebound. Investors are choosing to wait and observe, becoming more cautious.
Notably, this Monday, U.S. Treasury Secretary Becent announced that the White House will begin interviewing candidates to replace Powell as Federal Reserve Chairman. Powell's current term will expire in May 2026, and despite frequent political pressure from Trump, he has repeatedly reaffirmed his intention to complete his term. Wall Street rumors suggest that Federal Reserve Governor Waller is likely to succeed Powell as Federal Reserve Chairman after his 2026 term, and his views this week differ from some Federal Open Market Committee (FOMC) members.
On Monday, Waller stated that if the U.S. President reimplements the tariff measures announced on April 2nd, the Federal Reserve would have to quickly implement a series of "bad news" rate cuts. Waller warned that if Trump fully imposes tariffs after the suspension period, U.S. economic growth would "almost stall," and unemployment would surge from the current 4.2% to 5% next year. He also noted that while short-term inflation might spike to 5%, the upward price pressure trend might be temporary, opening space for the Federal Reserve to cut rates to offset economic slowdown.
Waller said, "Although I expect the inflation effects of tariffs to be temporary, their negative impact on output and employment may be more lasting and become an important factor in setting monetary policy stance. If the economic slowdown is severe, even approaching recession, I would tend to lower policy rates earlier and more significantly than previously expected."
Waller's assessment of rising unemployment is consistent with the New York Fed's consumer confidence survey released on Monday. The survey shows that 44% of Americans currently expect unemployment to rise in the next year, the highest level since the pandemic, and this percentage has increased by 10 percentage points since Trump took office.
Other FOMC members mostly advocate a "wait-and-see" approach. They state that they will not rashly adjust rates before seeing actual slowdown signs in hard data. Powell currently shares the same view.
Since the beginning of 2025, the Federal Reserve has maintained interest rates in the 4.25%-4.5% range. The market currently expects the Federal Reserve to make three rate cuts in 2025, with the first expected to begin in June. According to the CME "Fed Watch Tool" on April 16th, the probability of the Federal Reserve maintaining rates in May is 81.4%, and the probability of a 25 basis point rate cut in June is 60.1%.
Additionally, multiple investment banks have recently increased their expectations for Federal Reserve rate cuts this year. The latest to make changes is Deutsche Bank, which now expects the Federal Reserve to cut rates by 25 basis points in December, previously anticipating no rate cuts in 2025. They also predict two additional 25 basis point rate cuts in the first quarter of 2026, bringing the terminal rate to 3.5%-3.75%.
