The dilemma faced by Powell, like the market: "Schrodinger's Trump"

Overnight U.S. stocks staged a dramatic scene of "seven minutes of soaring". First, a report about Trump considering a 90-day suspension of tariffs triggered a frenzied market reaction, with U.S. stocks' market value soaring by about $2.5 trillion in just seven minutes. However, when White House Press Secretary Karine Jean-Pierre clarified that this was "fake news," the upward trend quickly reversed.

Analysts say that in the short term, the enigmatic and "quantum state" Trump may cause the stock market, which has plummeted, to stabilize. In the medium to long term, a real market reversal requires changing the narrative that tariff changes could trigger an economic recession, with potential triggering factors including action from the Federal Reserve.

However, facing the elusive Trump, akin to "Schrödinger's cat," Powell is also caught in a dilemma: should he stimulate the economy through interest rate cuts or maintain high rates to curb potential inflation risks?

Analysts believe that under the uncertainty of tariff policies, the Federal Reserve cannot predict what Trump will do, just like the market's predicament: if he maintains tariffs as stated, the economy may quickly shrink, and the S&P 500 index could fall into a bear market; but if tariffs are lifted, the economy may grow again, and the stock market could return to historical highs.

Premature rate cuts may stimulate inflation rebound, but it may be too late by the time everything is clear

Currently, the market leans towards rate cuts. After Trump announced "reciprocal tariffs," leading to a global stock market crash, traders are now betting that the Federal Reserve will cut rates 4 to 5 times this year, significantly higher than the 2-3 times anticipated before the tariffs were implemented. Wall Street has raised its inflation targets for this year while lowering economic growth forecasts, even warning that if Trump does not retreat from the brink of tariffs, the U.S. could fall into recession.

Federal Reserve Chairman Powell has taken a tougher stance on interest rates. Last Friday, in his first public statement after Trump announced widespread reciprocal tariffs, Powell reiterated that the Federal Reserve needs to wait and see, and consider action only when the situation is clear. He pointed out that the new tariffs announced by Trump far exceeded expectations and could continue to push inflation upward, and the Fed needs to ensure that inflation expectations do not rise.

Wells Fargo senior economist Sarah House stated: "The Federal Reserve is currently in an exceptionally difficult position." She expects the Fed to maintain interest rates at 4.25% to 4.5% for "as long as possible."

Former Federal Reserve official and Chief Economist at New Century Advisors Claudia Sahm stated: "In the current environment, which also has inflationary pressures, the Federal Reserve is unlikely to take preemptive action and implement insurance-style rate cuts." However, former Federal Reserve official and current Chief Economist at BNY Investments, Vincent Reinhart, warned that the danger of the Federal Reserve waiting for “clear evidence” of the tariffs' impact on the economy is that it may act too late. He added, “Waiting as long as possible is tailor-made for acting too late.”

Some also believe that if Trump insists on the harshest tariffs, the impact on consumer demand could be severe enough to eliminate any concerns about rising prices, shifting the focus entirely to economic health. As Krishna Guha of Evercore ISI stated: “From a probabilistic standpoint, this will ultimately not lead to long-term inflation.”

Until this “Schrodinger's Trump” state is resolved, market volatility will continue to intensify, potentially plummeting due to panic or rebounding sharply due to a sudden policy shift, with the only certainty being continued uncertainty.

Adam Posen, director of the Peterson Institute for International Economics, stated that the Federal Reserve will not “prejudge” the impact of tariffs or Trump’s fiscal plans (such as significant tax cuts). Posen pointed out, “Regardless of whether this is effective, this is clearly the stance that Powell and the Federal Reserve leadership have taken to respond to this political situation.” He also added that the Federal Reserve “can and perhaps should wait until September to consider interest rate cuts.”