Powell recently dropped a big bombshell, directly disrupting market expectations. I carefully looked at his speech content and found that this time the Federal Reserve is truly about to change, and we ordinary investors need to pay full attention to understand these changes.
There are three core changes.
The logic of policy-making needs to be rewritten: the old 'average inflation target' approach no longer works. After the pandemic, the supply chain has been facing problems frequently, and the tariff war has driven up the prices of imported goods. Now predicting inflation feels like guessing a blind box. Powell has directly stated that in the future, they will be more flexible and may not stick to historical data but will adjust policies based on the current actual situation.
The relationship between unemployment and inflation has been overturned: in the past, a low unemployment rate worried about inflation, but this trick no longer works. You see, the unemployment rate in the U.S. is clearly very low, yet inflation cannot be suppressed, indicating that there are structural problems in the economy. Powell acknowledges that chronic issues like supply chain disruptions and trade frictions will long-term push prices up, which is completely different from the previous short-term inflation dynamics.
The interest rate hike button is easier to press: this year, the FOMC voting committee has undergone a change, with three out of four new members being hawks. These people are already sensitive to inflation, and now facing the dual pressure of supply chain issues and tariffs, I estimate that as long as economic data heats up a bit, they will want to raise interest rates at any moment. The threshold for rate cuts has instead been raised significantly.
As ordinary investors, we need to understand these key impacts:
Riding the market roller coaster should be a norm: policy shift period + large data fluctuations = wild ups and downs become the norm. Last week, the two-year U.S. Treasury yield jumped 40 basis points in just one week; this kind of fluctuation would have scared people in the past.
Don't believe in the interest rate cut fairy tale: now Wall Street big firms are frantically cutting interest rate cut expectations, and Goldman Sachs has pushed the next rate cut to December. Powell has clearly stated that they need to see the impact of tariffs before taking action, but the tariff issue is like a bottomless pit.
Cash management is becoming important: short-term financial product yields may continue to rise, but the risks of long-term bonds are increasing. Strategies like Vanguard's that focus on 5-7 year government bonds can be referenced, allowing investors to earn interest while avoiding long-end fluctuations.
Personally, I think the most critical issue is the supply chain problem.
Now the United States has imposed tariffs on almost all countries, and importers either absorb the costs themselves or pass them on to consumers. The April CPI data looks okay because the inventory before the tariffs took effect hasn't been fully digested. Once new goods come in the third quarter, prices will rise again. If the Federal Reserve is soft on this, inflation will immediately spiral out of control; if they raise interest rates aggressively, it may lead to an economic recession—it's like walking a tightrope. Individual investors should avoid betting on the direction at this time; proper asset allocation is the key.
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