Fed, Powell remains ‘put,’ unclear and uncertain how the economy will pivot

Federal Reserve Chair Jerome Powell said the US central bank will remain patient and hold off on making any decisions to see how President Donald Trump’s tariff hikes will impact the economy long-term. Speaking in Arlington, Virginia, last Friday, Powell clarified the Fed is not preparing to intervene as it did during the economic crisis caused by the global pandemic.

Market expectations of a “Fed put,” the informal term for monetary policy interventions to cushion falling markets, were dampened as Powell made it clear the Fed will not act reflexively in response to recent stock market losses or weakening investor sentiment. “There’s a lot of waiting and seeing going on, including by us,” Powell said.

“We’re going to need to wait and see how this plays out. It feels like we don’t need to be in a hurry. It feels like we have time.”

The term “Fed put” has been part of market vernacular for nearly four decades, first associated with former Fed Chair Alan Greenspan following the 1987 market crash. Since then, Fed leaders have taken bold steps to prop up markets during moments of financial distress. 

No ‘Fed put’ this time

According to Powell, the market has two contradictory forces at play, a still-strong labor market on one hand and on the other, an inflation threat fueled by rising tariffs that could slow economic growth. 

“It’s not clear at this time what the appropriate path for monetary policy is,” Powell continued, “We are well positioned to wait for greater clarity.”

The March jobs report, released Friday, showed that total non-farm payroll employment rose by 228,000, beating expectations with an increase over the 12-month average of 158,000. The unemployment rate held steady at 4.2%. 

Yet, Powell admitted that these figures were compiled before Trump’s most recent tariff announcement and may not reflect the full impact of new trade policies.

Tariffs threaten to raise inflation and slow growth

Economists expect Trump’s latest round of tariff hikes, announced Wednesday, to raise the average tariff rate on America’s $3 trillion in annual imports from about 2.5% to potentially 25% or more. Powell argued such an increase could shoot consumer prices up and strain the Fed’s inflation mandate.

“Our obligation is to keep longer-term inflation expectations well anchored. We need to ensure that a one-time increase in the price level does not become an ongoing inflation problem,” he denoted in his prepared remark.

The Fed chair reckoned that the economy is fundamentally strong, but he warned that the combination of higher import prices and slower demand could push the US economy toward stagnation or worse. 

“The effects at the margin right now would be higher inflation and perhaps higher unemployment. That’s difficult for a central bank,” he propounded

Since aggressively raising rates in 2022 to combat high inflation, the Fed shifted gears last year with a full percentage point rate cut as inflation began to moderate. However, policymakers are now taking a more cautious position, even with pressure from Washington, who told the officials to “stop playing politics” and cut interest rates. 

Alan Blinder, former Fed vice chair and now a professor at Princeton, explained that Powell’s task is to dispel expectations that the Fed is preparing to cut rates rapidly. 

“That does not mean the Fed will never cut interest rates in response to this,” Blinder surmised, “If this develops into a recession, the Fed will probably cut.”

Wall Street is disappointed

Futures markets quickly adjusted their expectations after Powell’s latest public address. According to market data, the odds of a rate cut at the Fed’s upcoming May 6–7 meeting dropped from roughly 50% to about 30%. 56% of decentralized betting platform Polymarket’s participants believe there will be no rate cuts come May.

“We’re not in a situation like we were in the 1970s,” Powell said, referring to the decade when the US faced high inflation and unemployment, a scenario economists call stagflation. “But the risks at the margin today do point in that direction.”

JPMorgan economists now predict that the US economy will shrink by 0.3% this year, a downgrade from their earlier estimated 1.3% growth. They also expect the unemployment rate to rise to 5.3% by year’s end. 

The analysts also expect higher prices triggered by tariffs to push inflation at least a percentage point above where it would have otherwise landed, taking it further from the Fed’s 2% target.

Ignoring the clamors from New York’s busiest business street, Powell insists that the Fed will not be rushed into a response. “During the pandemic, the direction we needed to take was very clear,” he said. “Right now, it’s not.”