Powell’s Next Move: Can the Fed Calm Markets Amid Tariff Turbulence?

Federal Reserve Chair Jerome Powell’s next public appearance—scheduled for May 7 following the FOMC meeting—will once again thrust him into the spotlight as investors seek clarity on monetary policy. His April 4 speech, which emphasized caution amid tariff-driven inflation risks, left markets divided. While traders priced in aggressive rate cuts, Powell’s insistence on “waiting for clarity” underscored the Fed’s dilemma between soothing growth fears and fighting persistent inflation. With tariffs now a central threat to stability, will the central bank pivot to appease markets this time?

The April Speech: Caution vs. Market Optimism

In his April 4 remarks, Powell painted a nuanced picture of the U.S. economy. While acknowledging a “good place” with 4.2% unemployment and solid job growth, he warned that new tariffs risked derailing progress toward the Fed’s 2% inflation target. Core PCE inflation (2.8%) and rising near-term expectations highlighted the tension.

Markets reacted swiftly: traders priced in a full percentage point of rate cuts by year-end (via CME FedWatch data), betting the Fed would preemptively ease policy to offset tariff-driven growth slowdowns. Yet Powell’s speech offered no such assurance. Instead, he stressed that tariffs’ inflationary effects could be “significantly larger than expected,” urging patience until their economic ripple effects became clearer.

What’s Changed Since April 4?

Two developments have shifted the narrative ahead of the May meeting:
1. Tariff Escalation: President Trump’s May 1 announcement of 10% tariffs on $500B in Chinese imports, risking retaliation and a deeper drag on trade.
2. Soft Data Deterioration: April’s business surveys (e.g., ISM Manufacturing at 49.8, below 50 contraction threshold) signaled weakening demand, while consumer confidence dipped to 2024 lows.

Meanwhile, hard data remains mixed. March payroll growth (137K) and 4.1% unemployment align with Powell’s “broadly balanced” labor market narrative, but GDP forecasts have been trimmed to 1.5–2% for 2025.

The Fed’s Tightrope Walk

Powell faces a high-wire act:
- Inflation Anchoring: With core PCE at 2.8%, the Fed must prevent tariffs from pushing longer-term expectations above 2%. If inflation expectations rise, rate cuts become riskier.
- Growth Risks: Slowing payrolls and soft surveys suggest the economy is near its peak. A prolonged trade war could push unemployment above 5% by 2026, per Fed models.
- Political Pressure: Trump’s public calls for rate cuts (and his 40% approval rating) complicate the Fed’s independence.

What to Watch in the May Minutes

1. Policy Language: Will the FOMC drop “modestly restrictive” stance or signal openness to cuts?
2. Tariff Impact Assessments: Minutes may reveal internal debates on tariffs’ inflation/growth trade-offs.
3. Rate Projections: If the June meeting includes a Summary of Economic Projections (*), look for downward GDP revisions and higher inflation forecasts.

Why Markets Might Still Be Disappointed

Despite dovish pricing, three factors could temper euphoria:
1. Fed’s Data-Driven Discipline: Powell has repeatedly stressed that policy hinges on incoming data. Without clear inflation easing (e.g., core PCE below 2.5%), cuts may stay off the table.
2. Global Spillovers: A New York Fed model (Global MCT) shows U.S. inflation is now 30% influenced by global factors. A stronger dollar or European energy crises could worsen domestic price pressures.
3. Balance Sheet Risks: The Fed’s slowed balance sheet runoff (to $650B/year) aims to stabilize markets, but prolonged asset purchases could erode credibility.

Conclusion: Fed’s Hesitation Is the New Normal

The Fed’s May meeting is unlikely to deliver the “policy pivot” markets crave. While tariff risks justify caution, Powell will likely reaffirm the “wait-and-see” stance, citing anchored long-term inflation expectations and a resilient labor market.

The data tells the story:
- Tariff-Driven Inflation: U.S. import prices rose 3.2% in April, with tariffs accounting for 1.5% of the increase (BLS).
- Job Market Resilience: Average hourly earnings grew 0.3% month-over-month in April, suggesting wage pressures remain muted.
- Global Uncertainty: Fed’s Q1 beige book noted “heightened caution” among businesses, with 60% citing tariff concerns.

Investors betting on a June rate cut (currently priced at 65%) may face a reality check. The Fed’s priority remains inflation control, and until core PCE dips below 3%, patience—not easing—will dominate. As Powell put it in April: “The Fed’s job is to navigate uncertainty, not eliminate it.” For now, that means more volatility—and fewer answers.