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On Truth Social, President Trump stated, “Powell’s Termination Can’t Come Fast Enough!” His comment, posted early Thursday morning, followed a speech by Jerome Powell on Wednesday afternoon. Unlike the ECB and other central banks that are cutting rates, Powell and the Fed hesitate to do so. Despite expectations for lower economic growth, they worry that tariffs will boost inflation. Consider the following statements from Powell’s speech to the Economic Club of Chicago.
The level of tariff increases announced so far is significantly larger than anticipated, and the same is likely to be true of the economic effect, which will include higher inflation and slower growth.
When asked if the Fed would step in if the market failed, Powell stated, “No, I think the market is functioning as it should, even though there are many uncertainties.
Tariffs are highly likely to generate at least a temporary rise in inflation. The inflationary effects could also be more persistent
While Trump’s post reads like he wants to terminate Powell, it’s unclear if he is referring to the scheduled end of Powell’s term in 2026 or seeking to remove Powell as chairman in the coming months. Powell also commented on the possibility of termination. Per his speech:
So our independence is a matter of law. Congress has in our statute, we’re not removable except for cause. We serve very long terms, seemingly endless terms. So we’re protected in the law. So Congress could change that law, but I don’t think there’s any danger of that. Fed independence has pretty broad support across both political parties and in both sides of the Hill. So I think that’s not a problem.
What To Watch Today
Earnings
- No notable earnings releases today
Economy
Market Trading Update
Last week, we discussed the “tariff reprieve” that sent stocks ripping higher in the 3rd largest one-day advance on record.
“As we said last week, any good news would cause the market to rally sharply. On Wednesday, President Trump announced a 90-day pause on the full effect of new tariffs. Interestingly, the same headline sent stocks surging on Monday but was quickly deemed “fake news” by the White House. I suspect that Monday was a “leak” by the White House to test the market response, and President Trump kept that announcement handy to stave off a further decline in the markets. Whatever the reason, the markets needed the break.”
However, this week, the market was hit following a speech by Fed Chair Jerome Powell, in which he stated that the administration’s tariffs could spark “higher inflation and lower growth.” If that sounds familiar, it should. In 2021, Powell noted that inflation would be transitory as the money supply exploded by 42%. He was wrong then and is likely wrong again by fixating on hypothetical tariff shocks while ignoring the deflationary “red flags” from falling oil prices, slowing consumption, declining savings rates, and rising delinquencies.
As noted above, Trump is again after Powell, and his statement is correct. The ECB’s decision to cut rates for the seventh time was unanimous. Regardless of Powell’s reason for his position, the stress on the financial system is increasing. As we noted last week, credit spreads are rising, and there is clear evidence that the economy is weakening as consumer demand softens. The Federal Reserve remains overly concerned about missing the inflation push in 2021 by not recognizing the impact of shuttering economic production and sending checks to households. As such, the Fed will likely be late once again in identifying the deflationary pressure of tariffs on economic growth. Of course, just as in 2018, the Fed began cutting rates quickly during 2019 to stem the “repo crisis”. The Fed may be wrong again.
While the markets await the next Federal Reserve meeting, the uncertainty over monetary policy weighs on markets as much as the uncertainty about tariffs. This past week, the market reversed some of its gains from the massive “tariff reprieve” surge. With the MACD back on a buy signal and money flows turning positive, buyers are tepidly stepping back into the market. The 20-DMA continues to act as overhead resistance, defining the current downtrend. While there is undoubtedly a risk of another test of recent lows, which should be expected and why caution remains advisable, a break above the 20-DMA would lead to a rally to the 50-DMA. (Today’s blog post addresses the “Death Cross” and what it means for investors.)
As is always the case, the market prices in current events and looks forward with more optimistic expectations. While there are many media headline-driven narratives, the tariffs are now a well-known factor, and markets have priced most of the impact into current prices and valuations. Furthermore, the bond market appears to have started resolving the recent “basis trade” blow-up, with bond yields and volatility declining.
Does that mean the market is now devoid of risk? No. However, remember that as investors, the hardest thing to do is buy stuff when everyone else is selling.
The Week Ahead
The economic calendar will be light this week, but a slew of Fed speakers and earnings reports will undoubtedly make headlines.
As noted in the opening, Powell came off as hawkish last week. Will other members confirm that bias, or are there opposing points of view? Moreover, will any Fed members provide more information on potential liquidity problems arising in the Treasury market?
As the table below shows, there are a significant number of earnings reports due this week. However, earnings from the largest companies, especially the Magnificent 7, which tend to impact the entire market more heavily, will not be released until next week.
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Related: Racing the Tariffs: How Frontrunning Is Fueling Economic Momentum