Powell reiterated that the Federal Reserve will wait and see before taking action, warning of the dual challenges of inflation and the economy, and denied the need for a market rescue

Author: Li Dan, Wall Street Journal

Federal Reserve Chairman Jerome Powell continues to ignore President Trump's calls for interest rate cuts. He reiterated that Trump's policies, such as tariffs, create significant uncertainty for the economy, and the Fed will wait for clearer conditions before considering rate cuts to avoid prolonged inflation driven by tariffs.

Powell stated that the Fed will balance its dual mandates of inflation and employment, while acknowledging that if tariffs push up inflation and slow economic growth, achieving these dual mandates will be challenging. This has been interpreted as raising concerns about stagflation.

Powell expects that, in the face of unprecedented uncertainty, financial markets such as U.S. stocks will continue to fluctuate, but he denied that the Fed would "rescue the market" like investors betting on a Fed Put option, as the market is operating normally and orderly.

Reiterating to Wait for Clearer Conditions Before Considering Policy Adjustments

On Wednesday, April 16, at 4 PM Eastern Time, Powell delivered a speech titled "Economic Outlook" at the Chicago Economic Club. In his prepared remarks, he summarized:

"We are fully capable of waiting until conditions are clearer before considering adjustments to our policy stance."

This conclusion mirrors what Powell said over a week ago during his first public remarks following Trump's announcement of reciprocal tariffs. Before mentioning this conclusion, Powell quoted a line from the 1980s American comedy film Ferris Bueller's Day Off, where the main character Ferris Bueller says, "Life moves pretty fast."

Nick Timiraos, a senior reporter known as the "New Fed Communicator," commented that Powell conveyed a frustrating message. When mentioning waiting for clearer conditions before considering policy adjustments, he referenced the local Chicago acknowledgment of the unpredictability of world events, reflecting this point.

Timiraos noted that Powell warned that in trying to mitigate the economic impact of the trade war, the Fed may face a difficult trade-off between lowering inflation and supporting economic growth. The Fed remains vigilant about the possibility of rising prices alongside slowing economic growth.

Reiterating That Tariffs May Have More Lasting Effects, Claiming Tariffs Exceed Fed's Upper Expectations

When discussing the impact of Trump's policies, Powell stated that the Trump administration's policies in trade, immigration, fiscal, and regulatory areas are still evolving, and their "impact on the economy remains highly uncertain."

Regarding the impact of tariffs, Powell's remarks this time almost verbatim repeated his speech from over a week ago on April 4. He said:

"Tariffs are highly likely to at least lead to a temporary increase in inflation. The impact on inflation may also be more lasting. Avoiding this will depend on whether long-term inflation expectations can be stabilized, the scale of the impact, and how long it takes for the effects to fully transmit to prices."

Over a week ago, Powell stated that the recently announced tariffs "far exceeded expectations," believing that the impact of tariffs on the economy could also be greater than anticipated. In Wednesday's speech, Powell reiterated this view, stating:

"The announced tariff increases so far are significantly larger than expected. Their economic impact may be similarly so, including rising inflation and slowing economic growth."

Powell's speech then pointed out that recent survey and market-based inflation expectation indicators have risen significantly, with survey respondents noting the impact of tariffs. However, in the surveys, long-term inflation expectation indicators mostly remained stable, and market-based inflation expectation indicators, such as the breakeven inflation rate, are still close to 2%.

In the Q&A session, Powell noted that the magnitude of Trump's tariff increases even exceeded the Fed's upper-end expected scenarios.

"The level of tariffs has exceeded the expectations of forecasters, certainly higher than our expectations, even under our upper-end expected scenarios."

The Fed May Face Conflicting Challenges Between Employment and Inflation Dual Mandates

Like his remarks a week ago, Powell reiterated:

"Our (the Fed's) responsibility is to keep long-term inflation expectations stable and ensure that one-time price increases do not become a persistent inflation problem."

Following this statement, Powell hinted that the Fed may find itself in a dilemma of needing to curb high inflation while also supporting economic growth. He said:

"In fulfilling this responsibility, we will balance the goals of maximum employment and price stability, while keeping in mind that without price stability, we cannot achieve a strong labor market that benefits all Americans.

We may find ourselves in a situation where these dual mandates conflict with each other. If this situation does occur, we will consider how far the economy is from each goal and the expected time frames for narrowing these gaps."

Timiraos commented that Powell's speech emphasized his earlier point that the Fed will not be able to prevent the weakness brought about by the trade war, as he mentioned that the Fed may face conflicting challenges between its dual mandates of inflation and employment.

The Economy "Very Likely" to Deviate from Inflation and Employment Targets This Year

In the Q&A session following the reading of his speech, Powell stated that he still believes the overall condition of the U.S. labor market is "very good," but pointed out that for the remainder of the year, the U.S. economy "very likely" will "move away" from the dual targets of inflation and employment, "or at least not make much progress."

Powell acknowledged that this situation could make it "very difficult" for the Fed to make judgments.

When commenting on the significant uncertainty related to the Trump administration's trade policies, Powell stated, "There is no modern experience to think about this issue."

Powell expects that reduced immigration will not have a significant impact on U.S. inflation. He said that labor supply and demand are declining in sync, which has kept the unemployment rate stable.

Denying the Fed Put, Emphasizing Market Order and Expected Operations

Powell does not support the notion of a Fed Put, which bets that the Fed will rescue the stock market. When asked if the Fed would intervene to cut rates if the market crashes, Powell replied, "No." His explanation was that in the face of rapidly changing uncertainties related to tariff policies, the market is operating normally and in an orderly manner.

When asked about the sell-off in the U.S. bond market that occurred with the decline of the dollar, Powell stated, "It's hard to understand in real-time what's happening." He mentioned that in his career, he has seen situations where a narrative could explain significant volatility in the bond market, but months later, that narrative was deemed incorrect.

Powell said, "It's too early to assert what exactly happened in the bond market last week," adding, "Clearly, some deleveraging is taking place." He also stated, "I won't try to draw conclusions about the recent rise in U.S. Treasury yields."

Powell emphasized that the market is orderly and "operating as you would expect."

Powell stated that he expects the market to "continue to fluctuate," as the backdrop is "a historically unique situation filled with great uncertainty."

The Fed Will Continue to Work Independently of Political Influence; Fed Independence is a Legal Issue

On Monday, U.S. Treasury Secretary Mnuchin stated that he has "been considering candidates for the next Fed chair and plans to start interviewing potential candidates in the fall." This remark has reignited speculation about changes in Fed leadership. Noted financial analyst Jim Bianco believes Powell may face two fates: either being directly dismissed by Trump or being sidelined, as the nominee for Powell's successor could make statements that undermine his authority.

On Wednesday, when asked about the political threats facing the Fed chair position, Powell stated that the Fed's independence is granted by U.S. law, and government officials cannot be dismissed without cause. He said, "Our (the Fed's) independence is a legal issue."

Powell mentioned that the U.S. Supreme Court is hearing a case exploring whether the president has the authority to dismiss personnel from independent government agencies. He believes this case, which affects government layoffs, does not apply to the Fed, but he is unsure of its applicability.

Powell stated that the Fed will continue to do its job without political influence. Regardless of political pressure, the Fed will carry out its responsibilities.

Powell described himself as enjoying public service, calling it the best job in government. He said that critics keep him grounded, so he does not feel like a god.

Reiterating That Government Debt Will Become Unsustainable and Needs to Be Addressed

Last month's Federal Reserve monetary policy meeting decided to slow the pace of reducing the balance sheet (quantitative tightening, QT) starting this month. Specifically, the monthly redemption cap for U.S. Treasuries was significantly lowered from $25 billion to $5 billion.

On Wednesday, Powell reiterated that slowing the pace of QT will allow the QT policy to last longer. "We hope this process can continue. Currently, its pace is quite slow. We think this is a good thing. It needs to last longer."

Powell believes that using dollar swap lines during periods of financial market turbulence ultimately benefits U.S. consumers.

Powell reiterated that U.S. federal government debt is "heading toward unsustainability," but has not yet reached unsustainable levels. He again warned about the large deficits and debt levels of the U.S. government, stating, "This is a problem we urgently need to address," and that the debt issue should be resolved sooner rather than later.

Powell stated, "No one really knows how much more federal debt we can continue to accumulate."

He also pointed out that politicians focus on discretionary spending areas—spending outside of welfare programs like Social Security and Medicare—but this is not the real issue. In fact, discretionary spending "has already been declining."

Commentators believe this statement is actually a mild rebuttal to the government efficiency department (DOGE) led by Musk, which aims to cut discretionary government spending.

However, Powell did not specifically criticize DOGE. He stated that it is unclear how DOGE plans to implement cuts to federal government spending, "It's too early to draw conclusions now."

Reiterating That Bank Capital is Adequate; Expecting Relaxation of Regulations on Banks Regarding Cryptocurrencies

When asked about financial regulation, Powell reiterated the widely accepted view among U.S. regulators that the banking system is "well-capitalized." He stated that the banking system has considerable resilience to "various shocks it may face."

Powell noted that certain small and medium-sized banks have a high concentration of commercial real estate (CRE) loans. "We are actively addressing" issues related to the CRE sector. His personal opinion is that the U.S. should complete the implementation of Basel III.

Powell stated that the credit supply from non-bank institutions is "growing very rapidly," adding that this financing model locks in funds and does not lead to situations like bank runs.

However, Powell added that private credit has not yet truly undergone stress testing. "We are closely monitoring this."

Powell believes there needs to be a regulatory framework for stablecoins. He expects that there will be a relaxation of regulations on the banking industry regarding cryptocurrencies.

AI is an Upgrade of Humanity

When discussing artificial intelligence (AI), Powell said he initially viewed AI as an upgraded version of Google, "but that's not the case; it is an upgrade of humanity."

Regarding whether the jobs created by AI will outnumber the jobs it replaces, Powell responded, "We don't know."