For quite some time now, Jerome Powell, the Federal Reserve Chair, has been meticulously working to guide the economy toward a smooth transition, often referred to as a “soft landing.” The inflation surge in 2022, primarily due to pandemic-driven stimulus and supply chain disruptions, prompted the central bank to hike interest rates to curb soaring prices. Largely succeeding, inflation has dipped below 3%, nearing the Fed’s target of 2%, all while steering clear of a recession.
Subsequently, the goal was to adjust the federal funds rate back to what’s considered a neutral rate, roughly pegged at 2.5% by the central bank. The Fed initiated this move in September, however, progress seems to have stagnated amidst weakening consumer confidence and persistent inflation.
Currently, the economy faces a pivotal moment as tensions rise following President Donald Trump’s tariff announcements on April 2, sparking a trade war. Investors are keenly tuned in to Fed Chair Powell, who today made his first address since these global tariffs were declared.
Let’s delve into the crucial insights from Powell’s discourse and uncover the subtle undertones of his speech.
### Powell: Inflation is likely to make a comeback
Usually, Powell steers clear of commenting on policies originating from Congress or the Oval Office. Yet, at a gathering of the Society for Advancing Business Editing and Writing this morning, he highlighted the ramifications of the wide-reaching tariffs announced earlier in the week. He also remarked on how shifts in immigration, fiscal measures, and regulatory policies are influencing the economic landscape.
The nagging question regarding tariffs wasn’t just about their potential to hike prices, but more about the longevity of these heightened prices. “Tariffs are very likely to cause at least a temporary rise in inflation,” he noted, “but the possibility remains that these effects could endure longer than anticipated.” He reiterated that the Fed’s responsibility is to “ensure that a singular price elevation doesn’t morph into a prolonged inflation issue.”
It’s not entirely unexpected that tariffs would cause a transient price surge across multiple sectors. The larger concern, however, revolves around tariffs possibly igniting an inflationary cycle as businesses adjust prices upwards to compensate for the increased costs, especially if global trade tensions escalate. The Fed made an oversight in 2022, dismissing inflation as transitory, and is cautious not to repeat the same mistake.
### Stagflation is a risk
Amidst growing concerns, the job market has shown remarkable resilience, even as consumer confidence dips and inflation remains sticky. The March jobs report surprised many, showing an addition of 228,000 jobs last month, yet economists foresee an impending weakening of the job market.
Powell did point to an elevated risk of simultaneously experiencing heightened unemployment and inflation, the two ingredients of what economists term “stagflation,” though he avoided using the term directly. The Fed’s toolbox isn’t ideally equipped to handle both challenges simultaneously.
Typically, the Fed manages economic activity by modifying interest rates; raising them to combat inflation or lowering them to stimulate economic activity during high unemployment periods. Powell mentioned that if faced with both inflation and unemployment, the Fed would prioritize addressing the aspect that diverges the most from its dual mandate of full employment and a 2% inflation rate.
### Powell’s hidden message
Today’s theme in Powell’s address mirrored past messages—uncertainty. After maintaining interest rates during their last meeting in March, today’s dialogue further hinted at ongoing economic unpredictability.
Although Powell affirmed that current economic data points to continued strength, he subtly hinted at possible turbulent times ahead. This insinuation was not lost on investors, as evidenced by the S&P 500’s sharp 10.5% drop over just two days. While he didn’t outright advise investors to brace for impact, his remarks suggested that challenges like rising unemployment and inflation could worsen before improving.
### What it means for investors
The Nasdaq Composite plunged into a bear market today, slipping by 5.8% and marking a 22.7% fall from its December peak. Not too far behind is the S&P 500, which took a near 6% hit today and stands 17.4% below its February high. For investors who monitor their portfolios closely, these have been tough days.
The short-term fallout from the tariffs remains uncertain, yet President Trump appears steadfast in maintaining them.
For those actively buying stocks, this could be viewed as an opportune moment; valuations have suddenly become more attractive compared to just a few days ago, paving the way for strong companies to rebound and resume steady growth trajectories.
For others, it’s vital to remember that the American stock market has weathered far deeper declines in the past and has always bounced back to reach new peaks. The coming weeks will shed more light on the tariffs’ repercussions, but investors should find solace in the unwavering long-term growth record of the S&P 500.
