Tariff Volatility Cools During 90-Day ‘Pause’; Powell Refuses to Confirm ‘Fed Put’

The 90-day pause for many tariffs and a flurry of negotiations have markets in a semi-volatile “watching and waiting” mode. Markets long for some level of certainty and will have to wait for clarity on worldwide trade policy. Among those watching and waiting: the Fed. Fed Chair Powell’s Wednesday remarks highlighted the uncertainty of possible outcomes; he warned of tariff-driven price hikes could trigger a rise in inflation. He has also recently described possible tariff-induced price increases as potentially “transitory” (an interesting choice of words!) and said the Fed is “well positioned” to wait for clarity. That last remark prompted a question regarding the “waiting” part: would the Fed respond to market turmoil with liquidity, rate cuts, or both—i.e., is the “Fed put” real? Powell: “I’m going to say no.” Stock market indices dropped immediately upon the word “no.”  Of course he said no—the “Fed put” is like Fight Club: the first rule of the “Fed Put” is you never say “Fed put.” If he says yes and confirms the put, that will spur risky market behavior (a.k.a. “moral hazard”).  What about the data?  The recent CPI and PPI reports showed some price softening, as annual headline CPI dipped to 2.4% (sub 2.5% is significant), with PPI dropping into negative territory for March (after spiking in January and February). However, all bets are off as markets expect possible distortions over the next few months. Many consumers have been rush purchasing big-ticket items, such as automobiles, before anticipated tariff-induced price increases.   Will enough countries strike new deals with the U.S. in time to avoid potential price increases? Consumer confidence and employment survey data for April indicate consumers are nervous about job security and inflation. How will behavior play out in the next few months? Speaking of job security (his own), Powell said, “It’s a matter of law.” He also mentioned the “dual mandate challenge.” If inflation spikes and growth slows down, what will the Fed respond to? Stay tuned…

By David R. Pascale, Jr., Senior Vice President at George Smith Partners.