Powell confronts the "Trump tariff shockwave" tonight: the Fed's independence is facing the ultimate test in 2024

Original title: “Powell speaks out tonight, and the global market pays attention to three major suspense”

Original author: Zheng Yao, Jin Shi data

Reprint: Daisy, Mars Finance

Tonight, all eyes will be on Fed Chairman Jerome Powell. He will speak at the Economic Club of Chicago event at 1:30 a.m. CST on April 17. Investors, analysts and market participants around the world are waiting for Powell’s response to a series of recent economic developments.

Interestingly, Powell’s speech will take place where Trump will visit in October 2024 and talk about high tariffs and the change of Fed chairman. Despite the temporary suspension of U.S. tariffs on more than 75 countries around the world for 90 days, the overall economic outlook remains uncertain and fears of a U.S. recession are rising.

Powell’s speech today is bound to provide important clues about the current state of the economy, the impact of tariffs, and the direction of interest rates in 2025. The market will focus on three suspense:

· In the face of Trump’s tariff policy and the pressure of the White House to “change the leadership”, how will the Fed stick to its tradition of independent decision-making?

· Against the backdrop of falling inflation but heightened recession risks, will Powell’s rate cut expectations change?

· As the “hawk and dove debate” within the Fed gradually heats up, will the aggressive interest rate cuts of Waller and other officials affect decision-making?

In his previous speech, Powell said that Trump’s tariff hike was much larger than the Fed expected, and the impact on the economy could be greater than expected. As such, he believes that there is a high degree of uncertainty about the near-term policy implications, and a clearer picture will await before further adjustments. He also stressed that the current policy stance is good, and a wait-and-see attitude can be taken, and the policy is still moderately restrictive. As for whether there will be a recession in the US economy, he noted that the Fed does not have a probabilistic forecast of the possibility of a recession, but external forecasters have raised it. In terms of rate cut expectations, Powell did not change his view at the March meeting, arguing that weaker economic growth and rising inflation will offset each other, allowing the Fed to maintain its expectation of two rate cuts in 2025.

Powell is facing pressure from many parties to “cut interest rates”. U.S. inflation seems to be gradually coming down. The latest March CPI data shows that inflation is trending further downward. At the same time, Trump has been in favor of low interest rates, and now this stance has also created problems for Powell. If interest rates are cut quickly and sharply, inflation could be triggered again; However, if the rate cut is delayed, it could drag on the US economy.

Powell and most Fed officials still believe that now is not the right time to cut interest rates. Although the U.S. economy is starting to show weakness, especially in the job market, the Fed still seems inclined to keep its policy rate steady in case of a new round of inflation from Trump’s tariffs. The minutes of the Fed’s March meeting showed that its economic projections and dot plot hinted at two possible rate cuts in 2025.

But Trump’s tariffs not only raise the risk of a recession in the United States, but may also force the Fed to cut interest rates more aggressively. At the same time, market performance remains subdued, reflecting the failure of previous hopes of an accommodative Fed policy shift to translate into a real rebound. Investors have chosen to wait and see and tend to be cautious.

It is worth noting that just this Monday, US Treasury Secretary Bessant announced that the White House will begin interviewing candidates for the chairmanship of the Federal Reserve to succeed Powell. Powell’s current term expires in May 2026, and despite frequent political pressure from Trump, he has repeatedly reiterated in public that he will complete his term. Wall Street rumors suggest that Fed Governor Waller is expected to succeed Powell as Fed chair at the end of his 2026 term, and his views this week diverge from those of some members of the Federal Open Market Committee (FOMC).

Waller said on Monday that if the U.S. president reimposes the tariffs announced on April 2, the Fed will have to quickly make a series of “bad news” rate cuts. Waller warned that if Trump imposes tariffs across the board after the moratorium ends, U.S. economic growth will “virtually stagnate” and the unemployment rate will climb sharply from the current 4.2% to 5% next year. He also noted that while inflation could spike to 5% in the short term, the upward trend in price pressures may only be temporary, which would open up room for the Fed to cut interest rates to hedge against the impact of the economic slowdown.

“While I expect the inflationary effects of tariffs to be temporary, their negative impact on output and employment is likely to be more persistent and an important factor that must be taken into account when setting monetary policy stances,” Waller said. If the slowdown is severe and even on the brink of recession, then I would be inclined to cut the policy rate earlier and more sharply than previously expected."

Waller’s judgment of rising unemployment is also in line with the results of the New York Fed’s consumer confidence survey released on Monday. According to the survey, 44% of Americans now expect the unemployment rate to rise in the coming year, the highest level since the pandemic, and it has risen by 10 percentage points since Trump took office.

Other FOMC members tend to advocate a “wait-and-see” attitude. They said they would not rush to adjust interest rates until they saw signs of an actual slowdown in the hard data. Powell is currently holding the same view.

Since the beginning of 2025, the Fed has kept interest rates in a range of 4.25%-4.5%. The market is currently pricing in three rate cuts by the Fed in 2025, the first of which will begin in June. According to the April 16 CME Fed Watch Tool, there is an 81.4% probability that the Fed will keep rates unchanged in May and a 60.1% chance of a 25bp rate cut in June.

In addition, a number of investment banks have recently increased their expectations for the Fed to cut interest rates this year, the latest of which is Deutsche Bank, which now expects the Fed to cut rates by 25 basis points in December, after not cutting rates in 2025, and also expects the Fed to cut rates by two more 25 basis points in the first quarter of 2026, bringing the terminal rate to 3.5%-3.75%.