Powell Notes Speech April 4, 2025: Powell think they are in a good positions to wait for greater clarity, and make sure one time price increases does not become a bigger problem
Imo this conference confirms my current thinking that it’s not going to be as easy for the FED to start cutting rates aggressively again as the markets think, and it will really depend if the impact on tariffs starts to be evident in coming data or not.
It does not seem however to be because the FED is focusing more on inflation or not, but mostly because they are currently so uncertain about the ultimate impact on both mandates, that they just don’t know what they should do at the moment.
Is clear inflation is going to increase and growth is going to be slowing but is still unclear to him what the appropriate path for monetary policy should be
Powell said the Fed is in a good position to wait for more clarity before adjusting policy. It’s still too early to determine the appropriate course.
He is focusing on the “highly uncertain outlook to wait because of major policy shifts from the new administration in trade, immigration, fiscal policy, and regulation.
Tariff increases are expected to be larger than anticipated, likely causing at least a temporary rise in inflation and slower growth, though the size and duration of these effects are still unclear.
He emphasized the difficulty in assessing the economic impact of tariffs without more clarity on their details.
The Fed’s priority is to keep long-term inflation expectations anchored and ensure that a one-time price surge doesn’t become persistent inflation.
According to him we’re not yet in a 1970s-style conflict between the 2 mandates, which is particularly hard for central banks to navigate.
He acknowledged that external forecasters see a higher risk of recession, though the Fed itself doesn’t assign probabilities.
Powell also noted frequent contact with other central banks, especially in uncertain times.
Kansas City Fed President Jeff Schmid says he’s “not willing to take any chances” on inflation.
Full quote: “So far, through the spike and subsequent decline in inflation over the past few years, the Fed’s actions have been effective in keeping longer-term inflation expectations well anchored. Now, with renewed price pressures likely, I am not willing to take any chances when it comes to maintaining the Fed’s credibility on inflation”
I=7 Powell says tariffs could pose a challenge for the fed’s dual-mandate
Powell says tariffs could pose a challenge for the fed’s dual-mandate.
“We may find ourselves in the challenging scenario in which our dual-mandate goals are in tension,” he said in prepared remarks for the Economic Club of Chicago. “If that were to occur, we would consider how far the economy is from each goal, and the potentially different time horizons over which those respective gaps would be anticipated to close.”
He pointed out that for the time being, they are well-positioned to wait for clarity before adjusting their policy stance.
The speech was largely similar to what he delivered earlier in the month.
Powell still sound very cautious, highlights how tariffs could have more lingering than a one time effect on inflation because of them being higher than expected, which I think is the risk that will not allow them to ease as fast in the face of a slowing economy
IMO the fed will still need to cut this year if the economy gets very weak, but they will be very slow to react to it, and will be dependent if tariffs impact if first seen in prices or unemployment.
My key takeaways today:
Contrary to most typical recessions, this is not an environment where the FED would be able to cut soon as aggressively if it materialized, which could make it more severe.
The FED will not support markets, unless something breaks, which Powell thinks they are still orderly → they say they are ready to provide liquidity to the world since a crisis can cause global dollar shortages usually
Powell thinks bank reserves are still abundant, and banks are well capitalized with liquidity and are quite resilient
The market continues to expect 4 cuts is 2025 despite Powell’s comments that they will wait until better clarity
Role Is to Make Sure Tariffs Cause Only a One-Time Price Increase
He cites a number of factors, including global supply chain disruptions and the auto industry in particular (supply shortage leading to inflation again), that could allow a one-time increase in the price level to prolong inflationary processes
Without price stability cannot achieve the long periods of strong labor market conditions that benefit all Americans
There is no fed put on the stock market, for Powell the market is only processing what is a huge period of uncertainty
Treasury market also very volatile, and there is some deleveraging going on with hedge funds, but is currently orderly, and they are only adjusting to the uncertainty currently also
There isn’t a modern experience for how to think about this. The increases proposed are bigger than the 1930 Smoot-Hawley levies, & that was 95 years ago
If uncertainty were to remain high, it would weigh on investment from all areas. The US will become a more structurally higher-risk jurisdiction, and hence investors will ask for a greater rate of return
Asked about loss in immigration, demand and supply of workers are falling in tandem. Not worried about the labor market at the moment adding to inflation. More due to the supply side.
The pace of shrinking the Fed’s balance sheet was slowed due to anticipated large flows in and out of reserves related to the debt ceiling and Treasury General Account, not due to concerns about reserve levels which are still considered abundant.
Will be ready to supply dollar liquidity to the rest of the work in case of a dollar shortage, through the swap lines standing → these markets are sensitive in times of crisis
Debt is on an unsustainable path, but not level yet. Is uncertain where the level limit will be.
Powell says is very early and difficult to have certainty if AI will replace a lot of people, or just make everyone more productive creating more jobs.
Trump has been discussing the removal of Fed Chair Powell with his advisors for months
Trump has reportedly discussed firing Fed Chair Jerome Powell for months and has even approached former Fed Governor Kevin Warsh about taking over the role, according to the Wall Street Journal.
“If I want him out, he’ll be out of there real fast, believe me,” Trump expressed in a meeting at the Oval Office.
Warsh and Treasury Secretary Scott Bessent have advised against it while other advisors have backed the president.
Legal Scholars said a 1935 court ruling which unanimously held that president Roosevelt lacked the authority to fire a Federal Trust Commissioner (FTC), offers the strongest guardrail to protect fed independence.
However, the Justice Department has said it wants to overturn the 1935 legal precedent.
Powell already said he thinks that even if the Supreme Court overturns the 1935 legal precedent, it would find a way to protect fed governors from removal.
Trump already fired two Democratic FTC commissioners, a move regarded as going against the 1935 ruling.
May 7 2025 FED Meeting: The market is seeing just a 2% chance of a rate reduction at tomorrow’s Fed meeting.
The market is pricing in 3 rate cuts by the end of the year, starting from July. This is down from 5 cuts seen in the first week of April after outlook has improved due to recent trade developments being more positive.
According to WSJ article, tomorrow meeting focus will be on how the fed will communicate their approach to the fact prices will go up due to tariffs, while the economy will slowdown.
But that Fed officials agree that rate cuts are inappropriate until they see concrete signs of slower consumer spending and higher joblessness.
“This is not going to be a cycle where the Fed pre-emptively cuts because there’s a forecast of a slowdown. They’re going to actually need to see it in the tangible data, in particular the labor market,” said Richard Clarida, who served as Powell’s second-in-command for three years and is now a senior adviser at bond giant Pimco.
The Fed left interest rates unchanged as expected, but noted increased risks of inflation
Fed kept interest rate unchanged in the range of 4.25%-4.5%, as was widely expected.
The Fed said uncertainty about the economy has increased further.
“Uncertainty about the economic outlook has increased further,” the post statement said. The Committee is attentive to the risks to both sides of its dual mandate and judges that the risks of higher unemployment and higher inflation have risen."
The statement pointed out that despite swings in net exports, the economic activity “has continued to expand at a solid pace”.
S&P 500 futures shed 0.5% while Nasdaq composite fell 1% following the fed statement.
Assessment: Fed is in a ‘wait and see’ mode, as the economic impact of tariffs remains uncertain.
It seems the Fed is in an even more reactive mode than before. They will wait until there is significant economic weakness to cut rate since they don’t want to risk inflation getting out of control.
This means that they could risk being late to cut this time.
“We don’t feel like we need to be in a hurry. We feel like it’s appropriate to be patient,” Powell said. “And when things develop—of course we have a record of—we can move quickly when that’s appropriate.”
Markets are pricing in a rate cuts starting in July, but I think that if economic data does not deteriorate sufficiently before that month, rate cuts will continue to be pushed for later in the year.
Some quotes:
If sustained, the tariffs are "likely to to generate a rise in inflation a slowdown in economic growth and an increase in unemployment.
Powell acknowledged the “challenging scenario in which our dual mandate goals are in tension”
Powell: my gut tells me that uncertainty about the path of the economy is extremely elevated and that the the downside risks have increased.
Surveys of households and businesses however report a sharp decline in sentiment and elevated uncertainty about the economic outlook largely reflecting trade policy concerns.
