Powell reiterates that the Federal Reserve will wait and see before taking action, warning of the dual challenges of inflation and the economy, denying the need to bail out the market

Federal Reserve Chairman Jerome Powell continues to ignore President Trump's calls for interest rate cuts. He reiterated that Trump's policies, such as tariffs, pose significant uncertainty to the economy, and the Fed will wait until the situation is clearer before considering rate cuts, aiming to avoid prolonged inflation driven by tariffs.

Powell stated that the Fed will balance its dual mandate of inflation and employment, while acknowledging that if tariffs drive up inflation and slow economic growth, achieving this dual mandate will be challenging. This has raised concerns about stagflation.

Powell expects that, faced with unprecedented uncertainty, financial markets such as U.S. stocks will continue to fluctuate, but he denied that the Fed would "rescue the market" like investors betting on a Fed Put option, as the market is operating normally and orderly.

Reiterating to wait for clearer conditions before considering policy adjustments

On April 16, Eastern Time, Powell delivered a speech titled "Economic Outlook" at the Chicago Economic Club. In his prepared remarks, he summarized:

"We are fully capable of waiting until (the situation is) clearer before considering adjustments to our policy stance."

This conclusion mirrors what Powell said over a week ago during his first public remarks after Trump announced the reciprocal tariff plan. Before mentioning this conclusion, Powell quoted a line from the 1980s American comedy film Ferris Bueller's Day Off, where the main character Ferris Bueller says, "Life moves pretty fast."

Nick Timiraos, a senior reporter known as the "new Fed communicator," commented that Powell delivered a frustrating message. When mentioning waiting for clearer conditions before considering policy adjustments, he reflected the local Chicagoans' acknowledgment of the unpredictability of world events.

Timiraos pointed out that Powell warned that in an effort to mitigate the impact of the trade war on the economy, the Fed may face the difficult trade-off of either reducing inflation or supporting the economy. The Fed remains vigilant about the possibility of rising prices while economic growth declines.

Reiterating that the impact of tariffs on inflation may be more persistent, stating that tariffs could even exceed the Fed's upper expectations

When discussing the impact of Trump's policies, Powell stated that the Trump administration's policies in trade, immigration, fiscal, and regulatory areas are still evolving, and their "impact on the economy remains highly uncertain."

Regarding the impact of tariffs, Powell's remarks this time almost verbatim repeated the content from his speech on April 4. He said:

"Tariffs are highly likely to at least lead to a temporary rise in inflation. The impact of inflation may also be more persistent. Avoiding this situation will depend on whether long-term inflation expectations can be stabilized, the scale of the impact, and how long it takes for the effects to fully transmit to prices."More than a week ago, Powell stated that the recently announced tariffs in the United States "far exceeded expectations" and that the impact of tariffs on the economy could also be greater than anticipated. In his speech on Wednesday, Powell reiterated this point, stating:

"The magnitude of the tariff increases announced so far is significantly larger than expected. Its economic impact may be similarly significant, including rising inflation and slowing economic growth."

Powell's speech then pointed out that recent inflation expectation indicators based on surveys and markets have risen sharply, with survey respondents noting the impact of tariffs. However, in the survey, long-term inflation expectation indicators mostly remained stable, and the market-based inflation expectation indicators' breakeven inflation rate is still close to 2%.

During the Q&A session, Powell noted that the magnitude of tariff increases under Trump even exceeded the Federal Reserve's high-end scenario assumptions.

"The level of tariffs exceeded the expectations of forecasters, and of course, it is also higher than our expectations, even in our high-end expected scenario."

The Fed may face conflicting challenges between employment and inflation dual targets

Like his speech a week ago, Powell again stated:

"Our (the Federal Reserve's) responsibility is to maintain stable long-term inflation expectations and ensure that one-time price increases do not become a persistent inflation problem."

Following this statement, Powell hinted that the Federal Reserve might find itself in a dilemma of needing to curb high inflation while supporting economic growth. He said:

"In fulfilling this responsibility, we will balance the goals of maximum employment and price stability, while keeping in mind that without price stability, we cannot achieve a strong labor market that benefits all Americans.

We may find ourselves in (the above) conflicting challenges of dual targets. If this situation indeed occurs, we will consider how far the economy is from each target and the expected time frames to narrow these gaps."

Timiraos commented that Powell's remarks emphasized his earlier point that the Federal Reserve would not be able to prevent the weakness brought about by the trade war, as he mentioned that the Fed might face conflicting challenges between inflation and employment dual missions.

This year's economy is "very likely" to deviate from inflation and employment targets

During the Q&A session following the reading of the speech, Powell stated that he still believes the overall condition of the U.S. labor market is "very good," but noted that for the remainder of this year, the U.S. economy is "very likely" to "deviate" from the dual targets of inflation and employment, "or at least not make much progress."

Powell acknowledged that the above scenario could make it "very difficult" for the Federal Reserve to make judgments.

In commenting on the significant uncertainty related to the trade policies of the Trump administration, Powell stated, "There is no modern experience to think about this issue."

Powell expects that the reduction in immigration will not have a significant impact on U.S. inflation. He said that labor supply and demand are declining in sync, which has kept the unemployment rate stable

Denying the Fed Put, Emphasizing Market Order and Expected Operations

Powell does not support the view of the so-called Fed Put, which bets that the Federal Reserve will save the stock market. When asked if the Fed would intervene to cut interest rates if the market crashes, Powell replied, "No." He explained that, in the face of rapidly changing tariff policies and related uncertainties, the market is operating normally and in an orderly manner.

When asked about the sell-off in the U.S. Treasury market that occurred with the decline of the dollar, Powell stated, "It's hard to understand in real-time what's happening." He noted that in his career, he has seen situations where a narrative could explain significant volatility in the bond market, but months later, that narrative was deemed incorrect.

Powell said, "It's too early to assert what exactly happened in the bond market last week," adding, "Clearly, some deleveraging is taking place." He also stated, "I won't try to draw conclusions about the recent rise in U.S. Treasury yields."

Powell emphasized that the market is orderly and operating "as you would expect."

Powell indicated that he expects the market to "continue to be volatile," as the backdrop is "a historically unique change in circumstances, filled with great uncertainty."

The Federal Reserve Will Continue Its Work Unaffected by Politics; Independence of the Fed is a Legal Issue

On Monday, U.S. Treasury Secretary Yellen stated that she has "been considering candidates for the next Federal Reserve Chair and plans to begin interviewing potential candidates this fall." This remark has reignited speculation about changes in the Fed's leadership. Noted financial analyst Jim Bianco believes Powell may face two fates: either being directly dismissed by Trump or being sidelined, as the nominee for Powell's successor could make statements that undermine his authority.

On Wednesday, when asked about the political threats facing the Fed Chair position, Powell stated that the Fed's independence is granted by U.S. law, and the government cannot dismiss Fed officials without cause. He said, "Our (the Fed's) independence is a legal issue."

Powell mentioned that the U.S. Supreme Court is reviewing a case exploring whether the president has the authority to dismiss personnel from independent government agencies. He believes this case, which affects government layoffs, does not apply to the Fed, but he is unsure of its applicability.

Powell stated that the Fed will continue to do its job without political influence. Regardless of the political pressure faced, the Fed will perform its duties well.

Powell described himself as someone who enjoys public service, calling it the best job in government. He said that critics keep him grounded, so he does not feel like he is above others.

Reiterating that Government Debt is Unsustainable and Urgently Needs to be Addressed

Last month's Federal Reserve monetary policy meeting decided to slow down the quantitative tightening (QT) actions of reducing the balance sheet starting this month. Specifically, the monthly redemption cap for U.S. Treasuries was significantly lowered from $25 billion to $5 billion.

On Wednesday, Powell reiterated that slowing the pace of QT will allow the QT policy to be sustainable for a longer period. "We hope this process can continue. Currently, its pace is quite slow. We think this is a good thing. It needs to last longer."Powell believes that using dollar swap lines during times of financial market turmoil ultimately benefits American consumers.

Powell reiterated that the U.S. federal government debt is "heading towards unsustainability," but has not yet reached an unsustainable level. He once again warned about the massive deficit and debt scale of the U.S. government, stating, "This is a problem we very much need to address," and that it is better to address the debt issue sooner rather than later.

Powell stated, "No one really knows how much more federal debt we can continue to accumulate."

He also pointed out that politicians are focused on discretionary spending areas—i.e., spending outside of welfare programs like Social Security and Medicare—but this is not the real issue. In fact, discretionary spending "has already been declining."

Commentators believe this statement is actually a mild rebuttal to the government efficiency department (DOGE) led by Musk, which is cutting discretionary government spending.

However, Powell did not specifically criticize DOGE. He stated that it is unclear how DOGE plans to implement cuts to federal government spending, "It is too early to draw conclusions now."

Reiterating Bank Capital Adequacy, Regulatory Relaxation Expected for Bank Cryptocurrency

When asked about financial regulation, Powell reiterated the widely accepted view among U.S. regulators that the banking system is "well-capitalized." He stated that the banking system has considerable resilience to "various shocks it may face."

Powell noted that certain small and medium-sized banks have a high concentration of commercial real estate (CRE) loans. "We are actively addressing" related issues in the CRE sector. His personal opinion is that the U.S. should complete the implementation of Basel III.

Powell stated that the credit supply from non-bank institutions is "growing very rapidly," adding that this financing model locks in funds and does not experience situations similar to bank runs.

However, Powell added that private credit has not yet truly undergone stress testing. "We are closely monitoring."

Powell believes there needs to be a regulatory framework for stablecoins. He anticipates that there will be a relaxation of regulations for the banking industry regarding cryptocurrency issues.

AI is an Upgrade of Humanity

When discussing artificial intelligence (AI), Powell said he initially viewed AI as an upgraded version of Google, "but that is not the case; it is an upgraded version of humanity."

Regarding whether the jobs created by AI will outnumber the jobs it replaces, Powell responded, "We don't know."