Jerome Powell, the Federal Reserve chair, has delivered a decisive message to the financial markets: the central bank will not be rushing to intervene. In his recent appearance at the Economic Club of Chicago, Powell made himself clear: investors should not expect immediate interest rate adjustments or any quick fixes to the bond market’s recent volatility.
A pivotal moment occurred when Professor Raghuram Rajan of the University of Chicago Booth School of Business inquired about the existence of a “Fed put” – an implicit promise of central bank intervention to protect the stock market. Powell’s response was unequivocal: “I’m going to say no.”
He acknowledged the market’s current struggles with uncertainty, leading to increased volatility, but maintained that the markets were functioning as expected during a period of high uncertainty.
This statement effectively dismissed speculation that the Fed would step in to stabilize the bond market after a surge in long-term debt yields.
Although the bond market has since stabilized, Powell attributed the recent turbulence to “markets processing a historically unique development,” emphasizing the orderly functioning of the markets.
Powell’s remarks disappointed those hoping for imminent interest rate cuts, including the US president, who desperately wants to mitigate the economic downturn and inflationary effects of his trade policies.
Powell indicated the Fed would “wait for greater clarity” before making any interest rate adjustments, anticipating that the tariffs would likely result in higher inflation and slower economic growth.
Powell highlighted the challenging balancing act the Fed faces in maintaining price stability and full employment. He suggested a “strong likelihood” the economy would deviate from both goals for the foreseeable future, hinting at a potential preference for controlling inflation. He stressed the importance of anchoring long-term inflation expectations and preventing temporary price increases from escalating into persistent inflation.
“Tariffs are highly likely to generate at least a temporary rise in inflation,” Powell stated, adding that “inflationary effects could also be more persistent.”
These statements appeared to provoke a strong reaction from the president, who expresses great displeasure with Powell’s policies. The president criticized Powell’s approach, advocating for interest rate cuts in line with other central banks. Reports indicate the president may be pursuing Powell’s removal, although no public decision has been made.
Despite unprecedented political pressure, Powell reiterated the Fed’s independence and his commitment to fulfilling his role, emphasizing that his position is “a matter of law” and that he would not be swayed by political influence. He emphasized his commitment to maintaining the Fed’s independence, and his dedication to his legal obligations.