Powell redefines inflation risk: tariff effects are not a short-term phenomenon.
Federal Reserve Chairman Powell clearly stated at the American Business Editors Association annual meeting that the comprehensive tariff policy promoted by the Trump administration will cause the U.S. average effective tariff rate to soar from 2.3% to 22%, surpassing the levels of 1930 (Smoot-Hawley Tariff Act). This move not only raises import costs but could also lead to 'persistent' inflation, undermining the Federal Reserve's previous assessment framework of 'temporary shocks.'
J.P. Morgan analysis indicates that the new tariff policy has raised the probability of a global recession to 60%, with prices of imported goods such as automobiles set to be the hardest hit. Bloomberg economists warn that this is the largest scale tariff action in 200 years, and the economic effects may exceed traditional model predictions.
Monetary policy shifts to a wait-and-see approach as Powell and Trump exchange barbs.
Trump publicly calls for Powell to 'immediately lower interest rates' to align with tariffs to stimulate the economy, emphasizing that falling energy prices and strong employment data create a 'perfect opportunity.' Powell counters that the biggest challenge currently is balancing inflation control with employment stability, as the contradictory data of 228,000 non-farm jobs added in March and an unemployment rate rising to 4.2% strengthens the necessity for a wait-and-see policy.
(Reuters) Reveals Powell's preferred recession indicator—the spread between 3-month and 18-month U.S. Treasury yields—plunged this week to -113 basis points, a new low since October 2024, with a one-day worsening degree reaching the highest since the 2008 financial crisis. Mizuho's strategy chief Jordan Rochester points out that it has been 21 months since the Federal Reserve raised interest rates without cutting them, and historical cycle models indicate a sharp rise in recession risk.
The specter of stagflation looms as U.S. stocks and oil prices plunge simultaneously.
Market concerns about a double whammy of 'economic stagnation + rising inflation' intensify, with the Dow Jones index plunging 2,000 points in a single day and the Philadelphia semiconductor index dropping 7%, while West Texas oil prices hit a four-year low. Despite this, Powell maintains the narrative of 'the fundamentals of the U.S. economy are good,' emphasizing that no substantial signs of deterioration have been observed.
Analysts warn that if the Federal Reserve insists on the current interest rate policy, the rise in corporate financing costs will exacerbate economic downturn pressures. A Bank of America report shows that surveyed fund managers have listed 'stagflation' as the greatest tail risk, with the percentage reaching a new high since June 2022.
