By Eric Vandenbroeck and co-workers

Trump Tariff Tailspin Worsens

President Donald Trump’s new tariffs are “larger than expected,” and the economic fallout, including higher inflation and slower growth, likely will be as well, Federal Reserve Chair Jerome Powell said on April 4 in remarks that pointed to the potentially tricky set of decisions ahead for the central bank.

“We face a highly uncertain outlook with elevated risks of both higher unemployment and higher inflation,” undermining both of the Fed’s mandates of 2 percent inflation and maximum employment, Powell told told a business journalists’ conference in Arlington, Virginia. These remarks pointed to difficult decisions ahead for the US central bank and did nothing to staunch global bloodletting in stock markets.

Powell spoke as equity markets from Tokyo to London to New York continued a swoon that has wiped some 10 percent off major US stock indexes since Trump announced a raft of new tariffs on trading partners around the world on April 2.

Investors had looked to Powell’s speech for reassurance that perhaps the Fed was poised to take supportive actions as it has in previous moments of extreme market duress, and Trump himself took to his social media platform to say now would be the “perfect time” for the Fed to cut interest rates.

But Powell did not address the sell-off directly, instead acknowledging that the Fed faced the same uncertainty engulfing investors and company executives.

Wall Street nosedived for a second straight day on April 4, confirming the Nasdaq Composite was in a bear market and the Dow Jones Industrial Average was in a correction, as an escalating global trade war spurred the biggest losses since the pandemic.

The Dow Jones Industrial Average, S&P 500, and Nasdaq Composite posted their largest two-day declines since the emerging coronavirus caused global panic during U.S. President Donald Trump’s first term. For April 3 and April 4, the Dow was down 9.3 per cent, the S&P 500 10.5 per cent and the Nasdaq 11.4 per cent.

Fallout from Trump’s sweeping tariffs stoked fears of a global recession, wiping trillions of dollars of value from US companies. Highlighting growing panic among investors, the CBOE Volatility Index, or Wall Street’s fear gauge, closed at its highest level since April 2020.

Since late on April 2, when Trump boosted tariff barriers to their highest level in more than a century, investors have dumped stocks, fearing both the new US economic reality and also how US trading partners might retaliate by steepening their trade barriers.

The Nasdaq slid on April 4, 962.82 points, or 5.82 percent, to 15,587.79, confirming the tech-heavy index was in a bear market compared to its record closing high of 20,173.89 on Dec 16.

Meanwhile, the Dow Jones Industrial Average fell 2,231.07 points, or 5.50 percent, to 38,314.86 points, confirming a correction to its record closing high of 45,014.04 on December 4.

The S&P 500 lost 322.44 points, or 5.97 percent, to close at 5,074.08 points, its lowest finish in 11 months.

“Right now, how bad it gets depends on how committed the administration is to this set of policies which the market is voting against,” said Steve Sosnick, chief strategist at Interactive Brokers.

US Federal Reserve chair Jerome Powell used a once-abandoned term to say the inflationary impact of tariffs was likely to be transitory, which was surprising to analysts.

Global governments began reacting to Trump’s tariff announcement on April 4, further undermining investor sentiment that a global recession could be averted. JP Morgan said it was forecasting a 60 per cent chance of the global economy entering a recession by year-end, up from 40 per cent previously.

China’s finance ministry said it would impose additional tariffs of 34 percent on all US goods from April 10. Meanwhile, the prime ministers of Britain, Australia, and Italy held talks on how to respond to Trump’s tariff salvo.

“We’re in the Wild West of a trade war right now,” said Mariam Adams, managing director at UBS Wealth Management.

Safe-haven buying in the bond market sent the yield on the benchmark 10-year Treasury notes to below 4 per cent.

This pushed US bank stocks down further, with the sector under pressure globally, as the prospect of interest rate cuts from central banks and a hit to economic growth from tariffs would crimp profitability. The S&P Banks index dropped 7.3 per cent.

All 11 S&P sectors dropped by more than 4.5 per cent, with energy the leading laggard for the second straight day, off 8.7 per cent, as companies tracked a 7.3 per cent decline in US crude prices.

US-listed shares of Chinese companies dived, with JD.com, Alibaba, and Baidu all down more than 7.7 percent.

For the week, the S&P 500 fell 9.1 per cent, the Dow declined 7.9 per cent, and the Nasdaq slumped 10 per cent.

Federal Reserve Chair Jerome Powell spoke publicly for the first time since Trump’s tariff announcement. Powell highlighted that the unexpectedly hefty tariffs could trigger higher inflation and slower growth, setting the stage for challenging decisions for US central bankers.

President Donald Trump’s new tariffs are “larger than expected,” and the economic fallout, including higher inflation and slower growth, likely will be as well, Federal Reserve Chair Jerome Powell said on April 4 in remarks that pointed to the potentially difficult set of decisions ahead for the central bank.

“We face a highly uncertain outlook with elevated risks of both higher unemployment and higher inflation,” undermining both of the Fed’s mandates of 2 percent inflation and maximum employment,  Powell told a business journalists’ conference in Arlington, Virginia. These remarks pointed to difficult decisions ahead for the US central bank and did nothing to staunch global bloodletting in stock markets.

Powell spoke as equity markets from Tokyo to London to New York continued a swoon that has wiped some 10 percent off major US stock indexes since Trump announced a raft of new tariffs on trading partners around the world on April 2.

Investors had looked to Powell’s speech for reassurance that perhaps the Fed was poised to take supportive actions as it has in previous moments of extreme market duress, and  Trump himself took to his social media platform to say now would be the “perfect time” for the Fed to cut interest rates.

But Mr Powell did not address the sell-off directly, instead acknowledging that the Fed faced the same uncertainty engulfing investors and company executives.

The S&P 500 Index was down another nearly 6 per cent, with the Dow Jones Industrial Average 5.5 per cent lower and the Nasdaq off 5 per cent, ending a two-day decline that is the worst since the onset of the coronavirus pandemic in March 2020.

“Powell’s comments support our view that the Fed is not poised to rush in and cut interest rates anytime soon, despite President Trump’s call right ahead of Chair Powell’s comments to do so,” Nationwide Chief Economist Kathy Bostjancic said. “As such, we maintain our view the Fed waits until (the fourth quarter) to cut interest rates as the acceleration in inflation in the coming months makes them hesitant to lower rates to support the slowing economy.”

 Powell said the Fed has time to wait for more data to decide how monetary policy should respond, but the central bank’s focus will be on ensuring that inflation expectations remain anchored, particularly if  Trump’s import taxes touch off a more persistent jump in price pressures.

“While tariffs are highly likely to generate at least a temporary rise in inflation, it is also possible that the effects could be more persistent,” Powell said. “Avoiding that outcome would depend on keeping longer-term inflation expectations well anchored, on the size of the effects, and on how long it takes for them to pass through fully to prices. We must keep longer-term inflation expectations well anchored and to make certain that a one-time increase in the price level does not become an ongoing inflation problem,” he said.

Powell said it was not the Fed’s role to comment on Trump’s policies but rather to react to how they might affect an economy that he and his colleagues regarded just a few weeks ago as being in a “sweet spot” of falling inflation and low unemployment.

“Uncertainty is high,” Powell said in response to a question from the event moderators. “What we’ve learned is that the tariffs are higher than anticipated, higher than almost all forecasters predicted.”

While it is unclear how it will play out, he said, “the same is likely to be true of the economic effects, which will include higher inflation and slower growth.”

Powell’s comments highlighted the tension the Fed is seeing emerge between “hard data” that remains solid - the economy added 228,000 jobs in March with a 4.2 per cent unemployment rate - and “soft data” like surveys and interviews with business contacts that point to a coming slowdown.

“We are closely watching this tension between the hard and soft data. As the new policies and their likely economic effects become clearer, we will have a better sense of their implications for the economy and monetary policy,” Powell said.

“We are well-positioned to wait for greater clarity before considering any adjustments to our policy stance. It is too soon to say what will be the appropriate path for monetary policy.”

 

Push and Pull

The confounding set of risks, with prices rising even as the economy weakens, has become increasingly central to recent Fed commentary as the scope of Trump’s tariff plans becomes clear and other countries respond.

China has announced retaliatory tariffs of 34 percent on all US goods, restrictions on the export of minerals critical to the tech industry, and other measures, including limits on imports of US-raised chickens - a nod to Trump’s support in rural, agricultural parts of the country.

Administration officials have so far downplayed the worst market sell-off since the onset of the Covid-19 pandemic as necessary for US economic gains in the future.

Retaliation by other countries, in this case one of the largest US trading partners and the wellspring of many trade grievances among US politicians of both political parties, is one of the channels Fed officials have said could cause Trump’s import taxes to lead to more persistent inflation.

While short of classic “stagflation,” Fed Governor Adriana Kugler this week said “we’re already seeing some upside risks to inflation and some real increases in inflation ... We may be seeing down the road a little bit of a slowdown as well,” in the economy overall.

The push and pull expected between slower growth and rising prices could well keep the Fed on hold until it is clear which trend takes hold more forcefully.

Investors in contracts tied to the central bank’s policy rate appear to be expecting the risks to growth will dominate.

Markets now expect four quarter-percentage-point interest rate cuts from the Fed this year versus three before Trump’s announcement of tariffs that could tax imports an average of as much as 27 per cent by some estimates, versus about 2.5 per cent at the end of the Biden administration.

 

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