Fed’s Powell indicates potential US stagflation; Gold zoomed

·       Wall Street closed mixed as chip stocks dragged on growing US-China tech war, while Trump’s China trade deal optimism helped consumer and industrials

·       United Health and NVIDIA dragged Dow Jones on subdued guidance amid Trump’s bellicose policies on China

·       Fed may be in wait & watch mode till at least July’25 to see Trump’s actual reciprocal tariff policies and progress on China trade talks

·       Fed may cut in September and December’25 to be ahead of any potential Trumpcession despite the threat of higher inflation

On Wednesday, April 16, 2025, Wall Street Futures slumped on Trump trade war uncertainty and growing concern about tech/chip export by various US big techs to China. Nasdaq-100 plunged almost 2%, the S&P 500 lost 1.3%, while DJ-30 slips almost 200 points. Nvidia plunged after the company disclosed that the US government had blocked sales of certain AI chips to China without a license. Nvidia also stated it expects to take a $5.5 billion revenue hit this quarter as a result. Shares of other chip stocks were also sharply lower, including AMD and Micron Technology; Mega caps also slumped led by Apple, Microsoft Meta, Amazon, and Alphabet.

Also, hawkish comments by Fed’ Powell affected Wall Street; but Gold traded around a fresh life time high as a preferred haven over UST. Gold jumped amid an increasing war of words between US and China over trade, tech and Trump’s comments to decouple China.

On April 16, apart from the ongoing Trump trade war tantrum, some focus of the market was also on Fed Chair Powell’s statement and comments on the US Economic Outlook:

Relevant Full text of Powell’s Speech at the Economic Club of Chicago, Chicago:

“At the Fed, we are always focused on the dual-mandate goals given to us by Congress: maximum employment and stable prices. Despite heightened uncertainty and downside risks, the U.S. economy is still in a solid position. The labor market is at or near maximum employment. Inflation has come down a great deal but is running a bit above our 2 percent objective.

Recent Economic Data

Turning to the incoming data, we will get the initial reading on first-quarter GDP in a couple of weeks. The data in hand so far suggest that growth has slowed in the first quarter from last year's solid pace. Despite strong motor vehicle sales, overall consumer spending appears to have grown modestly. In addition, strong imports during the first quarter, reflecting attempts by businesses to get ahead of potential tariffs, are expected to weigh on GDP growth.

Surveys of households and businesses report a sharp decline in sentiment and elevated uncertainty about the outlook, largely reflecting trade policy concerns. Outside forecasts for the full year are coming down and, for the most part, point to continued slowing but still positive growth. We are closely tracking incoming data as households and businesses continue to digest these developments.

In the labor market, during the first three months of the year, nonfarm payrolls grew by an average of 150,000 jobs a month. While job growth has slowed relative to last year, the combination of low layoffs and lower labor force growth has kept the unemployment rate in a low and stable range. Meanwhile, the ratio of job openings to unemployed job seekers has remained just above 1, near its pre-pandemic level. Wage growth has continued to moderate while still outpacing inflation. Overall, the labor market appears to be in solid condition and broadly in balance and is not a significant source of inflationary pressure.

As for our price-stability mandate, inflation has significantly eased from its pandemic highs of mid-2022 without the kind of painful rise in unemployment that has frequently accompanied efforts to bring down high inflation. Progress on inflation continues at a gradual pace, and recent readings remain above our 2 percent objective. Estimates based on data released last week show that total PCE prices rose 2.3 percent over the 12 months ending in March and that, excluding the volatile food and energy categories, core PCE prices rose 2.6 percent.

Looking forward, the new Administration is in the process of implementing substantial policy changes in four distinct areas: trade, immigration, fiscal policy, and regulation. Those policies are still evolving, and their effects on the economy remain highly uncertain. As we learn more, we will continue to update our assessment.

The level of the tariff increases announced so far is significantly larger than anticipated. The same is likely to be true of the economic effects, which will include higher inflation and slower growth. Both survey- and market-based measures of near-term inflation expectations have moved up significantly, with survey participants pointing to tariffs. Survey measures of longer-term inflation expectations, for the most part, appear to remain well anchored; market-based breakeven continues to run close to 2 percent.

Monetary Policy

As we gain a better understanding of the policy changes, we will have a better sense of the implications for the economy, and hence for monetary policy. Tariffs are highly likely to generate at least a temporary rise in inflation. The inflationary effects could also be more persistent. Avoiding that outcome will depend on the size of the effects, on how long it takes for them to pass through fully to prices, and, ultimately, on keeping longer-term inflation expectations well anchored.

Our obligation is to keep longer-term inflation expectations well anchored and to make certain that a one-time increase in the price level does not become an ongoing inflation problem. As we act to meet that obligation, we will balance our maximum employment and price-stability mandates, keeping in mind that, without price stability, we cannot achieve the long periods of strong labor market conditions that benefit all Americans.

We may find ourselves in the challenging scenario in which our dual-mandate goals are in tension. 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.

Conclusion

As that great Chicagoan Ferris Bueller once noted, "Life moves pretty fast." For the time being, we are well positioned to wait for greater clarity before considering any adjustments to our policy stance. We continue to analyze the incoming data, the evolving outlook, and the balance of risks. We understand that elevated levels of unemployment or inflation can be damaging and painful for communities, families, and businesses. We will continue to do everything we can to achieve our maximum-employment and price-stability goals.”

Highlights of Powell’s statements & comments on April 16, 2025:

·       Inflationary effects of tariffs could be more persistent, depending ultimately on inflation expectations

·       Our obligation is to keep longer-term inflation expectations well-anchored

·       We're well positioned to wait for more clarity for the time being

·       The administration's policies are still evolving, and the effects remain highly uncertain

·       We can’t have a strong labor market without price stability

·       The sharp decline in business and household sentiment, as well as elevated uncertainty, is reflecting trade policy concerns.

·       We may find ourselves in a scenario with dual mandates in tension with each other.

·       The labor market is solid, broadly in balance, not contributing to inflation.

·       March CPI data indicates PCE prices likely rose 2.3% in 12 months through March, with core PCE estimated at 2.6%

·       We are at or near maximum employment, inflation is a bit above the 2% goal and has come down a great deal.

·       Growth likely slowed in the first quarter of 2025 from last year's solid pace.

·       Strong first-quarter imports and subdued consumer spending are to weigh on GDP growth despite the surge in car sales to beat tariffs.

·       The US economy is solid, despite heightened uncertainty and downside risks

·       So far, larger-than-expected tariffs likely mean higher inflation and slower growth

·       We are well positioned to wait for greater clarity before considering any changes to the policy stance

·       Immigration is part of the reason growth has been so strong over the last couple of years

·       Still uncertain what the new trade policies will ultimately be

·       Car company’s supply chains are likely to be disrupted for years. That could lead to inflation persistence

·       Our role is to make sure this is a one-time increase

·       The Fed has to keep inflation expectations well-anchored

·       The Fed's job is to ensure this does not become ongoing inflation

·       Tariffs are larger, even than in the Fed's upside estimates

·       Unemployment is likely to go up as economy slows

·       We will be moving away from goals for the balance of this year. Perhaps we can resume next year.

·       The effects of the policy will likely move the Fed away from its goals

·       Tariffs could pose a challenge for the Fed between controlling inflation and boosting growth

·       Well positioned to wait for greater clarity before making changes to stance

·       Bank reserves are still abundant (about QT)

·       The markets are processing historically unique events, and volatility is likely to continue given the high uncertainty.

·       There's some deleveraging by hedge funds

·       Markets are orderly, and functioning as we would expect

·       Markets are processing the policy changes

·       It would be difficult if uncertainty remained high, it would weigh on investment.

·       If risks were structurally higher, that would make us less attractive

·       There is no modern experience dealing with tariffs of this size

·       High uncertainty leads to households and businesses stepping back from decisions

·       Changes in policies are fundamental. No real experience in how to analyze it with such incredibly high uncertainty

·       It will be a difficult judgment if the Fed's mandates do come into conflict

·       We could well be in a situation where we need to make a difficult decision

·       The tension between dual goals would be a difficult position for the Fed

·       Goals aren't really in tension now, labor is still strong

·       The Fed's two goals are not yet in tension, but the impulse is for higher unemployment and higher inflation

·       With cutbacks in Federal funding for science, I am hearing significant employment impacts

·       We don't know how big the government layoffs will be

·       The longer-term effects of immigration are not thought to matter much for inflation

·       Wage growth is sustainable

·       Government layoffs are not yet big enough to have a material effect on the economy.

·       The growth in the supply of workers has stagnated, but so has the demand for workers, keeping unemployment relatively stable.

·       Longer-term effects of immigration are not thought to matter much for inflation.

·       The labor market is in a really good place

·       Wage growth is sustainable

·       Growth in the supply of workers has stagnated, but so has demand for workers, keeping unemployment relatively stable.

·       Right now, we're still at full employment.

·       AI is likely to bring dramatic change. It's hard to know how it will shake out.

·       Tech innovation doesn't replace human labor in the long run

·       Prices don’t go down in the aggregate except in extreme situations that should not be encouraged

·       The framework might look more like what we had before 2020

·       I think there will be a loosening of bank rules on crypto

·       There will be some loosening of rules to allow innovation, but it needs to be done in ways that do not make banks less safe and sound

·       Crypto is becoming more mainstream

·       A legal framework for stablecoins is a good idea

·       The private credit market has not been through a real credit event, so the Fed is keeping a close eye on it.

·       The US financial system is well into the process of working out its problems with commercial real estate.

·       The banking system is well-capitalized and resilient to likely shocks including BASEL-III.

·       Running large deficits with full employment is something the country has to address

·       Domestic discretionary spending is small and declining as a share of federal spending. That is not the problem.

·       To reduce the deficit, we need to address the biggest parts of the Federal budget, it must be bipartisan.

·       US Federal debt on an unsustainable path, though not at an unsustainable level

·       Supporting dollar funding markets is good for US consumers

·       The Fed stands ready to supply dollars to global central banks if there is a shortage

·       The slower the Fed goes, the smaller the balance sheet can get without disruption

·       We're not close to the point where the Fed would stop balance sheet runoff altogether

·       Powell downplayed the risk to Fed independence from Trump firings case

·       Powell's remarks on Fed independence draw applause in Chicago

Analysis of Powell’s Speech and Comments on April 16, 2025:

On April 16, 2025, Federal Reserve (Fed) Chair Powell delivered a speech at the Economic Club of Chicago, focusing on the economic outlook and monetary policy amid significant fiscal policy shifts, particularly President Trump's tariff policies.

Economic Outlook: Powell noted that the U.S. economy remains solid, with the labor market at or near maximum employment. However, economic growth has slowed in Q1CY25 sequentially due to potentially higher imports to beat the Trump tariffs tantrum and tepid consumer spending growth despite strong motor vehicle sales and probable higher spending on grocery items.

Inflation Concerns: Inflation is running slightly above the Fed’s 2% target, with Powell estimating PCE inflation at 2.3% for April and core PCE inflation at 2.6%. He emphasized that tariffs are likely to cause at least a temporary rise in inflation, with the potential for more persistent effects if long-term inflation expectations become unanchored.

Tariff Impacts: Powell highlighted that Trump’s tariffs, which are significantly larger than anticipated, pose risks of higher inflation and slower economic growth, potentially leading to a scenario resembling stagflation (high inflation coupled with stagnant growth and rising unemployment). He noted that these tariffs could create a challenging situation where the Fed’s dual mandates—maximum employment and stable prices—are in tension.

Monetary Policy Stance: Powell stressed a cautious, data-dependent approach, stating the Fed is “well positioned to wait for greater clarity” before adjusting interest rates. He indicated no immediate plans to cut rates, despite Trump’s public calls for reductions, as the Fed monitors how tariff policies and other economic data evolve.

Fed Independence: During the Q&A session, Powell reaffirmed the Fed’s commitment to independence- stating that monetary policy decisions would be based solely on economic data, free from political influence. Powell, also a former Lawyer by profession/degree, highlighted a recent Supreme Court case regarding Trump’s firing of officials at independent agencies, asserting that Fed independence is protected by law and that he intends to serve out his term until May 2026.

Market and Fiscal Policy Observations: Powell described markets as “orderly and functioning” despite recent volatility, which he attributed to the logical processing of Trump’s trade policy shifts rather than systemic stress. He also expressed concern about the U.S. debt trajectory, noting it is on an “unsustainable path” with uncertain outcomes.

Stagflation Risks: Powell warned that the combination of tariff-driven price increases and potential economic slowdown could push the economy toward a scenario not seen since the 1970s, where the Fed might need to prioritize one mandate over the other. He suggested that the Fed would assess the economy’s distance from each goal and the time horizons for closing those gaps if such a scenario arises.

Powell’s comments reflect a cautious and vigilant Fed, grappling with heightened uncertainty due to unprecedented tariff policies. He underscored the need to monitor incoming data closely, particularly regarding inflation and growth, before making any policy adjustments. He did not signal an immediate policy intervention to shield markets from tariff-related disruptions, suggesting the Fed views current market reactions as within normal bounds rather than a crisis requiring a "put"-like response.

Powell acknowledged that tariffs could lead to higher inflation and slower economic growth, potentially resembling stagflation. He emphasized a data-dependent approach, stating the Fed is “well positioned to wait for greater clarity” before adjusting monetary policy. This indicates no preemptive rate cuts or other measures to counteract market turbulence caused by trade policies, contrasting with the concept of a "Fed put" where the Fed might swiftly ease policy to support markets as we have seen during the COVID crisis.

Powell’s remarks focused on balancing the Fed’s dual mandates (maximum employment and stable prices/minimum inflation) rather than explicitly protecting financial markets from tariff-induced volatility. He noted the risks of inflation becoming unanchored and economic growth slowing but avoided promising immediate action to stabilize markets, reinforcing the Fed’s cautious and independent stance.

Powell’s commitment to Fed independence, especially in response to political pressures from Trump’s calls for rate cuts, suggests a reluctance to adopt reactive policies akin to a "Fed put" solely to offset trade war impacts. He stressed that decisions would be driven by economic data, not political/Trump or market pressures. Powell’s comments lean toward patience and observation rather than signaling a readiness to deploy monetary policy as a direct countermeasure to market disruptions from Trump’s trade policies.

President Trump’s reaction to Fed Chair Powell’s Comments shows Trump’s deflection and attacks on Powell as attempts to shift blame for economic turmoil caused by his trade policies.

Trump reacted strongly to Federal Reserve Chair Jerome Powell’s April 16, 2025, comments at the Economic Club of Chicago, where Powell warned that Trump’s tariff policies could lead to higher inflation and slower economic growth, potentially creating a stagflationary scenario.

On April 17, Trump escalated his criticism via a Truth Social post, calling for Powell’s “termination” and describing him as “always TOO LATE AND WRONG.” Trump labeled Powell’s speech a “complete mess” and urged immediate interest rate cuts, contrasting the Fed’s inaction with the European Central Bank’s (ECB) seventh rate cut of the year. He argued that lower rates were needed as “oil prices are down, groceries (even eggs!) are down, and the USA is getting RICH ON TARIFFS,” claiming Powell was lagging behind global counterparts like the ECB.

Trump’s post did not directly address Powell’s concerns about tariffs driving inflation but instead deflected by focusing on rate cuts and Powell’s perceived failures. This outburst followed earlier pressure from Trump, who, on April 4, had called Powell’s refusal to cut rates “playing politics,” asserting it was the “perfect time” for reductions despite tariff-driven inflationary risks.

On early Thursday, April 17, 2025, Trump threatened to fire Powell soon:

“The ECB is expected to cut interest rates for the 7th time, and yet, “Too Late” Jerome Powell of the Fed, who is always TOO LATE AND WRONG, yesterday issued a report which was another, and typical, complete “mess!” Oil prices are down, groceries (even eggs!) are down, and the USA is getting RICH ON TARIFFS. Too Late should have lowered Interest Rates, like the ECB, long ago, but he should certainly lower them now. Powell’s termination cannot come fast enough!”

An influential Senior US Senator Elizabeth Warren, a Massachusetts Democrat and ranking member of the Senate Banking Committee, reacted strongly to President Trump’s pressure tactics on Federal Reserve Chair Jerome Powell following Powell’s April 16, 2025, comments on the stagflationary risks of Trump’s tariffs. On April 17, 2025, after Trump posted on Truth Social that Powell’s “termination cannot come fast enough” in response to Powell’s refusal to cut interest rates, Warren warned that Trump’s attempts to fire Powell could destabilize the U.S. economy.

Warren warned that if Trump were to illegally fire Powell, it would “crash markets in the United States,” emphasizing that the strength of the stock market and the broader economy relies on the Federal Reserve’s independence (credibility) from political influence. She argued that the “infrastructure” supporting economic stability depends on the Fed making decisions based on data, not politics.

Warren Tweeted: “If Donald Trump illegally fires Fed Chair Powell, he will crash our markets and cause more economic pain for American families.”

Senator Warren is a known critic of Powell’s deregulation move and also pressured Powell for rate cuts before the 2024 election amid rising unemployment. She had demanded the resignation of Powell just a few years ago amid small/mid banks turmoil for rising bond yields as the Fed goes for rate hikes. But Warren now may be right as if Trump tried to terminate Fed Chair Powell prematurely, it would affect Fed credibility and independence, affect USD, UST and also US stocks; Gold would soar more.

Conclusions: The Fed will not act or cut rates at Trump’s gunpoint

Although the Fed generally talks about 2.0% PCE inflation as a price stability target, in reality, it maintains 1.5% core/total PCE inflation and 2.3% core/total CPI inflation; i.e. around 1.9% average inflation (PCE+CPI) targets. The US Congress has entrusted the Fed dual mandate of a minimum 2% price stability or inflation along with maximum employment of 96.0-95.5% of the labor force; i.e. 4.0-3.5% headline unemployment rate. Now, the Fed needs to bring down average core inflation by around 100 bps to reach the target along with the unemployment rate by around 0.5% by mid-2027 to declare victory. As the inflation target is far from employment, and the overall economy is still robust, while labor is around the Fed’s maximum employment levels, the Fed will now prioritize minimum price stability mandate over maximum employment.

Trump’s existing tariffs of 10% on all US imports, coupled with 145% tariffs on Chinese goods (almost 15% of total merchandise imports), and sectoral tariffs of 25% on automobiles/ parts, metals will effectively make overall weighted US merchandise tariffs over 27.5% against earlier 2.5%. This will inevitably cause a higher cost of living for Americans, higher inflation, subdued discretionary consumer spending, tepid private capex/business investment, and eventually stagflation or an all-out recession.

Although, the US importers may have already stocked enough imported goods from China and elsewhere well in advance anticipating Trump trade war policies, and Trump also knows that very well, it may not be possible to make country-specific trade deals with every major trading partner like China, Japan, India, Vietnam, and EU within June 2025.

Trump will also keep sectoral tariffs on automobiles & parts (25%), metals (25%), pharmaceuticals (15-25%), and electronics (15-25%) for national security (no dependency on a foreign country/China) and also to make America Great Again. Thus Trump is also taking the path of US protectionism in tariff deals with other countries rather than a simple & straightforward 0% or 10% minimum tariff across the globe.

Fed sees stagflation as it projects lower economic (GDP) growth, higher inflation, and a higher unemployment rate for 2025 amid Trump policy uncertainty (trade, tariffs, and immigration). Fed may be in wait & watch mode till at least July’25 to see Trump’s actual reciprocal tariffs and any progress with the China tariffs negotiation front.

The potential higher Trumpflation as a result of Trump’s hawkish tariffs and immigration policies may be more on the supply side rather than demand. As a Central Bank, the Fed has a monetary policy tool, that can affect the demand side of the economy. Thus ideally, the Fed may have to hike rates to curtail demand to match the constrained supply amid Trump's trade war policy. But there is also a risk of recession and higher unemployment. Fed already cut 100 bps in late 2024 (September-December), anticipating Trump 2.0 and policy uncertainty. Fed cut 50 bps in September 2024 in an unusual panic mode after Trump’s election-winning probability started beginning to surge and beat Harris amid two consecutive ‘assassination attempts’ on his life. Thus Fed now has the policy space and time to wait & watch till at least H1CY25.

Fed may not cut in June’25 but may cut in September and December 2025 to manage inflation, keeping the unemployment rate around 4.0% longer-term sustainable goal. Fed will run the QT at a very nominal rate for USTs till at least June or even December’25.

Bottom line

Fed may cut in September and December’25 @25 bps each to be ahead of any potential Trumpcession curve. Fed may be in wait & watch mode till at least July’25, until Trump’s reciprocal tariff policies get a clear path. Fed may also focus on growing trade and Cold War rhetoric between the US and China.

Market Impact

On Thursday, April 17, 2025, Wall Street closed mixed. The S&P 500 edged up 0.15% buoyed by strong gains from Eli Lilly after reporting its experimental weight-loss pill matched the performance of Ozempic in a diabetes trial. In contrast, the Dow Jones (DJ-30) plunged 500 points, led by a slump in UnitedHealth shares amid subdued guidance due to Trump’s policy tantrum on pharmaceuticals and healthcare. The Nasdaq 100 also edged lower -0.10%, supported by Apple gain. Wall Street suffered weekly losses ahead of the Good Friday holiday. The Dow and Nasdaq-100 fell 2% for the week, while the S&P 500 was down nearly 1%.

On Friday, Wall Street recovered partially after Trump boasted about “big progress” in trade talks with Japan and his optimism for a fair deal with China. But Trump’s pressure on Fed Chair Powell to cut rates and the threat of premature termination also undercut stocks, USD, and UST, while boosting Gold to some extent.

On Thursday, Trump said:

·       I think we are going to make a very good deal with China

·       No one can compete with the US

·       The US will end up with a substantial number of baseline tariffs

·       I do not expect to experience difficulties in reaching a trade deal with any interested party

·       Had a very productive call with the President of Mexico yesterday. Likewise, I met with the highest-level Japanese Trade Representatives. It was a very productive meeting. Every Nation, including China, wants to meet! Today, Italy!

On Thursday, Trump’s optimism about a trade deal with China helped Wall Street to recover. Oil surged on the US sanction on Iran’s oil export to 3rd country refineries like China and India. Wall Street was boosted by energy, consumer staples, real estate, utilities, materials, industrials, consumer discretionary and banks & financials, while dragged by healthcare, techs and communication services. Chip stocks were under pressure from the growing tech war between the US and China on the export of high-end chips/CPUs to each other.

On Thursday, Dow Jones was dragged by United Health, NVIDIA (CEO in China for a talk), Amgen, Microsoft, Salesforce, Amazon, American Express and Visa (Chinese restrictions). On the positive side, Dow Jones was boosted by Nike, Boeing, Home Depot, P&G, Walt Disney, J&J, Walmart, Chevron (higher oil), Caterpillar and Apple. China's savvy consumer and industrial stocks helped Trump’s China trade deal optimism.

Weekly-Technical trading levels: DJ-30, NQ-100, and Gold

Looking ahead, whatever the fundamental narrative, technically Dow Future (CMP: 40700) now has to sustain over 40100 for a further rally towards 41300/42300-43300/44600, and even 45200 in the coming days; otherwise sustaining below 40000, DJ-30 may again fall to 39700/38600-37000/36200 in the coming days.

Similarly, NQ-100 Future (19000) has to sustain over 19300 for a further rally to 196000/20000-20900/21400 and even 22000-22400 in the coming days; otherwise, sustaining below 19250, NQ-100 may again fall to 18600/18000-17600/16400 and 16200-15800 in the coming days.

Also, technically Gold (CMP: 3240) has to sustain over 3265-3275 for a further rally to 3305/3335*-3355/3375*-3400/3425, and even 3450/3500-3525/3555 in the coming days; otherwise sustaining below 3255-3245, Gold may again fall to 3180/3130-3065/2990 and 2960/2900*-2800/2750 in the coming days.