Good morning, brothers. Powell's speech last night disappointed the market. In fact, the logic we discussed before can explain this situation: the market's sharp decline is mainly due to policy uncertainty and unexpected changes, so issues like tariffs can only be resolved through the tariff policy itself. Now, the best choice for the Federal Reserve is to remain steady, because if the Fed takes action and Trump does not, the effects will be greatly diminished; conversely, if Trump acts first, then the Fed actually has no need to move.
The pace of the Federal Reserve's next actions should be as follows: they will first observe the impact of the tariff policy implemented in early April on inflation and the economy. As Fed official Waller said the day before yesterday, if a 10% tariff has little effect on inflation, and there are signs of an economic slowdown, then the Fed would have reason to cut interest rates.
Another possibility is that a larger economic shock suddenly appears, and then Powell may need to play the role of a savior, not only cutting rates but possibly even restarting large-scale asset purchase programs (essentially printing money).
As for the reduction of the balance sheet, it should stop by the latest third quarter (although Powell may say it is just a "pause").