Faced with the collapse of the U.S. stock market caused by Trump, the Federal Reserve still finds it difficult to rescue the market

In recent years, Federal Reserve Chairman Jerome Powell has often sent strong messages when he deemed it necessary: during the outbreak of the COVID-19 pandemic, he promised on television to support the economy to the fullest; in 2022, he delivered a brief speech with stern comments on inflation; after the collapse of Silicon Valley Bank in 2023, he stepped up to provide support for the financial markets.

However, despite the current plunge in the U.S. stock market—last week the S&P 500 experienced its largest two-day drop since March 2020, with sell-offs leading to a loss of over $5 trillion in value—Powell has not signaled support for the market, as both the Federal Reserve and the market still struggle to determine the impact of Trump's policies on the economy.

Powell hinted last Friday that now is not the time to execute the "Fed put," even as American household wealth evaporates and economic activity faces real risks.

The "Fed put" is Wall Street's term for the Federal Reserve's actions to support a plummeting stock market. After the infamous "Black Monday" crash of the U.S. stock market in October 1987, former Fed Chairman Alan Greenspan cut interest rates and injected liquidity, and this term initially appeared in the form of the "Greenspan put." Successive Fed leaders have taken other significant measures to respond to the ensuing crises, which helped curb market losses and even aided in reversing the market.

No Federal Reserve officials would admit that the "Fed put" is part of their policy toolbox, but Wall Street has had an inherent confidence in its existence for nearly 40 years.

Although stock price fluctuations can affect the economy by changing household wealth and altering expectations, the dynamics in the first few weeks of Trump's presidency have generated a plethora of conflicting signals, making it difficult for the Fed to choose a clear path so far.

Recently, the Fed's motto has been: act swiftly and forcefully when problems become apparent. Powell stated last week, "Many, including us, are watching and it seems the right thing to do when uncertainty rises." This indicates that the Fed is not in a hurry to cut rates, as it would only do so if a crisis necessitates a clear response from the central bank.

However, in the Fed's recent decision-making, avoiding falling behind the situation is equally important. If Powell and other officials seem inclined to cut rates to stabilize the economy, the risk the Fed would face is that inflation remains high, and the economy requires interest rates to stay elevated.

To cut or not to cut rates? The Fed's dilemma: rising inflation vs. economic stagnation

The Federal Reserve began rapidly raising interest rates in 2022 because it needed to curb inflation. Last year, as inflation slowed, the Fed cut rates by a full percentage point. After significant rate cuts, policymakers now seem inclined to wait, as the U.S. government may introduce other fiscal and tax measures after raising tariffs, which could change the outlook again.

Rising inflation

The average tariff rate in the U.S. may now increase tenfold, from around 2.5% to 25% or higher; the initial impact is expected to be reflected in prices, as producers and importers will at least partially pass on costs to consumers Economists believe that this year's price increases could lead to an overall inflation rate that is one percentage point or more higher than normal, which is far from the Federal Reserve's 2% target. As households and businesses adjust to higher prices, demand is expected to slow down—this somewhat hints at stagflation.

Former Federal Reserve Vice Chairman and Princeton University economics professor Alan Blinder stated, “Powell's top priority right now is to eliminate the notion that the Federal Reserve is about to rush into significant rate cuts.” Blinder added, “This does not mean the Federal Reserve will never cut rates to address this situation. If it develops into a recession, the Federal Reserve may cut rates.”

Currently, the U.S. economy has not shown signs that it urgently needs rate cuts. This week, the U.S. March CPI data will be released. According to economists' predictions, the U.S. March CPI is expected to rise 0.1% month-on-month, the smallest increase since last July. Meanwhile, the core CPI, excluding volatile food and energy costs, is expected to rise 0.3% month-on-month and 3% year-on-year.

In the first two months of this year, the U.S. core CPI has shown signs that the long-term downward trend in inflation is stagnating. Industry insiders believe that the new round of tariff measures by Trump will pose an upside risk to inflation, so the slowdown in inflation data may only be temporary.

Last week, U.S. 2-year inflation expectations surged to a new high since 2022. The Federal Reserve closely monitors these indicators to help guide its monetary policy decisions, as they indicate potential movements in actual inflation. Powell even referred to inflation expectations in 2019 as “the most important driver of actual inflation.”

Typically, long-term inflation expectations are given more weight because they are seen as excluding short-term disturbances. One of the long-term inflation expectation market indicators favored by the Federal Reserve—the 5-year forward inflation rate—is currently around 2.3%, down from a peak of 2.47% in January of this year.

Economic Risks of Recession

Tariff shocks may also exacerbate the Federal Reserve's dilemma, as it needs to curb price pressures while also guarding against the risk of a deteriorating labor market.

Data released last Friday showed that U.S. non-farm employment growth in March remained strong; however, Powell cautiously pointed out that this data was collected before Trump announced the tariffs. Powell stated, “It is still unclear... what the appropriate monetary policy path is. We need to wait and see how things develop.” At present, the Federal Reserve may find itself marginalized between a potentially weakening economy and inflation driven by tariffs.

Powell said, "When we face high inflation, it is painful for the country... but we know what we need to do (start raising interest rates to curb demand and price pressures). During the pandemic, the direction we needed to take was very clear, we took strong measures, and we did it (by rapidly cutting interest rates and implementing a series of other plans to restore economic growth and employment)."

However, more and more people believe that Trump's tariffs, even if they do not directly trigger a recession in the U.S., will hinder economic growth. S&P Global has raised the probability of a U.S. recession from 25% in March to the current 30% to 35%. HSBC has increased the probability of a recession in the U.S. stock market to 40%.

JP Morgan also joined the camp predicting a U.S. recession last Friday, with economists forecasting a 0.3% decline in real GDP for the year, down from a previous forecast of 1.3% growth, and an unemployment rate rising from the current 4.2% to 5.3%. Following the implementation of the tariffs, JP Morgan also raised the probability of a recession in the U.S. and globally to 60%, an increase of 20 percentage points from before.

On April 6, Goldman Sachs' research team significantly raised the probability of a U.S. recession over the next 12 months to 45%, a sharp increase of 10 percentage points from previous forecasts. This report also lowered the GDP growth expectation for the fourth quarter of 2025 to 0.5%, halving the original forecast. Just last Monday, Goldman had raised the probability of a U.S. recession over the next 12 months from 20% to 35%.

In the face of the destructive impact of tariffs, trading activity in futures contracts related to Federal Reserve meetings shows that the market has shifted from expecting less than three rate cuts this year to nearly four. Other futures trades conducted last week anticipated that the Federal Reserve might only act slowly, but this outcome would ultimately lead to larger rate cuts next year.

Wall Street analysts expect that the impact of tariffs will prompt the Federal Reserve to cut rates further to boost the economy. Goldman Sachs expects the Federal Reserve to cut rates three times this year, a prediction echoed by the Royal Bank of Canada. UBS expects the Federal Reserve to cut rates by 75 to 100 basis points for the remainder of the year, while Citigroup reiterated its expectation of a 125 basis point cut starting in May, and JP Morgan estimates two cuts of 25 basis points each this year.

Stagflation on the rise?

However, Powell and other Federal Reserve officials do not believe that their ability to reach the inflation target is in direct conflict with the goal of maintaining low unemployment. Powell stated, "Our current situation is not like the 1970s." At that time, double-digit inflation coincided with relatively high unemployment However, Powell pointed out that the current marginal effect may lead to rising inflation, and possibly an increase in the unemployment rate, "which is difficult for central banks—because these two challenges require different solutions."

Kevin Flanagan, head of fixed income strategy at Wisdom Tree, stated: "This is a very unstable situation, and the outcomes are not fixed, which brings incredible volatility to the markets in front of us. For U.S. Treasury yields to continue to decline from now on, you need to see the economy start to slow down. But on the other hand, what will inflation be?"

In this context, Powell stated that "it feels like we don't need to rush" until the direction and pace of economic development become clearer.

Regarding the current situation, Bloomberg macro strategist Cameron Crise commented: "While acknowledging that tariffs seem to be higher than expected, (Powell) appears more concerned about the potential impact on inflation and inflation expectations rather than economic growth. Notably, the report did not mention financial markets or financial conditions; the strike price of the Fed's put options still seems far out of reach."