In the early morning of March 8 (Beijing time), Federal Reserve Chairman Jerome Powell delivered a speech at the University of Chicago Booth School of Business. He stated that Federal Reserve officials are closely monitoring the impact of the Trump administration’s policies but remain relatively optimistic about the current economic conditions.
“Despite elevated uncertainty, the U.S. economy remains in good shape. The labor market is solid, and inflation is close to our 2% longer-run objective.”
Market Reaction
Powell’s statement helped ease market concerns about a potential U.S. economic recession. As he spoke, all three major U.S. stock indexes rebounded and turned positive. The Nasdaq rose nearly 1% at one point. By the close:
- Dow Jones Industrial Average: +0.52%
- Nasdaq Composite: +0.7%
- S&P 500: +0.55%
Interest Rate Outlook
Regarding the much-anticipated interest rate cuts, Powell emphasized the need for caution and stated there is no urgency to adjust policy interest rates at this stage. Fed Governor Adrienne Kugler echoed this sentiment, saying it may be appropriate to keep interest rates stable for “some time.”
Powell reiterated that if the economy remains robust and inflation does not fall further towards the 2% target, the Federal Reserve may maintain the current benchmark interest rate. However, he also noted that if the job market weakens unexpectedly or inflation drops significantly, the Fed may consider resuming rate cuts.
U.S. Job Market & Economic Indicators
The latest U.S. non-farm payroll report for February, released on Friday, indicates signs of a slowing job market:
- New non-farm payrolls: 151,000 (slightly below market expectations)
- Unemployment rate: Rose from 4% to 4.1% (highest since November last year)
Traders currently anticipate a 75 basis point rate cut this year, with 25 basis points reductions expected in June, September, and December.
Powell emphasized the importance of government data, stating that non-farm payrolls are the “gold standard” for measuring economic conditions. While the labor market remains solid, Powell acknowledged that consumer spending may be weakening, and policy uncertainty under the Trump administration could impact future consumption and investment decisions.
Impact of Tariff Policies
Federal Reserve officials are also monitoring the effects of Trump’s tariff policies on prices. Powell noted that achieving the 2% inflation target remains a challenge and that tariffs have increased short-term inflation expectations.
However, he also pointed out that long-term inflation expectations remain stable and aligned with the Fed’s target. He further stated:
“If we knew the tariff impact was a one-off, the Fed should have ‘ignored it’—meaning not adjusted its interest rate policy, according to textbook economics.”
Still, the Fed needs to determine whether the tariff-induced price increases are temporary or indicative of a broader, sustained trend.
U.S. Treasury Secretary Scott Bessant also commented that while tariffs may cause short-term price adjustments, they are unlikely to trigger long-term inflationary pressure.
Stock Market Volatility
During Powell’s speech, the three major U.S. stock indexes rebounded strongly:
- Nasdaq: +0.9% at one point
- S&P 500: Recovered from an earlier 1.2% drop
- Dow Jones: Initially down over 403 points before recovering
Despite Friday’s gains, U.S. stocks still suffered their worst week in months:
- S&P 500: -3.1% this week
- Nasdaq Composite: -3.5% this week
- Dow Jones Industrial Average: -2.4% this week
This volatility reflects market concerns over uncertainty, particularly surrounding Trump’s trade policies.
Fed’s Policy Strategy Moving Forward
On March 7 (Eastern Time), Fed Governor Adriana Kugler released a speech on the Federal Reserve’s official website, reinforcing Powell’s stance. Kugler stated:
“Given the recent rise in inflation expectations and the lack of progress on key inflation fronts toward our 2% objective, it is likely appropriate to maintain the policy rate at its current level for some time.”
She highlighted that inflation has been moving sideways since mid-2023, with rising inflation in non-market core services and commodities adding pressure.
Employment Outlook
Kugler believes the recent non-farm payroll report indicates that the labor market remains well-balanced, with the supply and demand for labor staying roughly in equilibrium.
Similarly, Atlanta Fed President Raphael Bostic has stated that it may take several months to fully understand how Trump’s policies will impact the economy. This suggests that Fed officials are likely to maintain a cautious stance on interest rates until at least late spring.
Summary
- Powell signaled that interest rates may remain unchanged for a long time.
- The U.S. labor market remains stable but shows early signs of slowing.
- Market expectations point to rate cuts in June, September, and December.
- The Fed is closely watching Trump’s tariff policies and their inflationary effects.
- Stock markets rebounded but ended the week with significant losses.
- The Fed remains in a wait-and-see mode, prioritizing caution in policy adjustments.
The coming months will be crucial in determining whether inflation trends and labor market conditions warrant a shift in the Fed’s stance. Until then, investors should prepare for continued market volatility.
