With markets still in turmoil over tariffs, investors now turn their attention to what Fed Chair Powell says this morning for clues on the state of the US economy and the path for easing.
President Trump has made it clear what he wants:
This would be a PERFECT time for Fed Chairman Jerome Powell to cut Interest Rates.
He is always “late,” but he could now change his image, and quickly. Energy prices are down, Interest Rates are down, Inflation is down, even Eggs are down 69%, and Jobs are UP, all within two months - A BIG WIN for America.
CUT INTEREST RATES, JEROME, AND STOP PLAYING POLITICS!
Always watching...
However, Bloomberg's Anna Wong believes Powell could adopt a decidedly more hawkish tone, dashing hopes that a “Fed put” to rescue investors is just around the corner.
Even with markets crashing around him, we see a high chance of a hawkish pivot. Since Powell last spoke March 19, President Donald Trump has announced the highest level of US import tariffs in a century.
The consensus among economists – and from internal Fed models – is that core PCE inflation will likely come in above 3.5% in the fourth quarter of this year.
In the mean time, the hard economic data remain solid.
From his perspective, Powell likely assesses he can no longer claim “uncertainty” as a reason to avoid sending a clear signal about inflation. We expect he’ll say that in case of a conflict between the Fed’s dual mandates – full employment and price stability – the Fed will prioritize the latter. That’s a point he has made in the past, at the height of the inflation flare in 2022.
“The Fed is in a tough spot,” said Gang Hu, managing partner at Winshore Capital Partners, as this morning's big positive surprise payrolls print makes it harder for Powell to hint at 'Fed Put' cuts to save the world as stocks fall (Good News is Bad News).
Al-Hussainy, rates strategist at Columbia Threadneedle Investment, says “the market is betting that recession risks and the tightening of financial conditions will force the Fed to cut aggressively" now up to 100bp this year and rising.
As for Powell’s speech, Al-Hussainy says:
"If we get any pushback against this from Powell & Co., front end rates may end up offside."
Markets are already fully pricing in a quarter-point move by June, with the chance of an emergency inter-meeting cut rising rapidly...
Open interest in the April fed funds futures has soared following Thursday’s action, which included a big block buyer for 48,000 contracts over the morning session, equivalent to approximately $1.9 million per basis point in risk. Open interest jumped in the tenor, Friday data showed, signaling the trade as a new long position rather than covering an existing short.
At 8:57am New York, 48,000 SOFR April fed funds futures blocked at 95.6750, with price action consistent with a buyer...
...and almost 5 full rate-cuts are priced in for the whole of 2025...
That is dramatically more cuts than The Fed expects in its Dot Plot.
“The markets will find it hard not to price in more Fed cuts until risk sentiment stabilizes,” said Jordan Rochester, head of macro strategy for EMEA at Mizuho International Plc.
“At this stage, I suspect they will be cautious to give too much of a steer for markets given the inflationary issue tariffs may cause.”
Hard data (like the jobs report) continue to strength while 'soft' survey data plunges...
The question is - will the former finally crack and catch down to the latter?
“This jobs report is going to create an absolute mess for the Fed response to economic risks,” said Guy LeBas, chief fixed income strategist for Janney Montgomery Scott.
“The ‘best’ case for risk assets is that the data deteriorate quickly enough to generate a Fed response. The bad case for risk assets is that jobs muddle through in the face of warmer short-term inflation prints.”
I hope that, in his remarks in a couple of hours, Federal Reserve Chair Powell will find the opportunity to elegantly walk back two things he said at his last FOMC press conference. Specifically,
Retire once again the word "transitory" from his vocabulary when talking about the potential inflationary impact of tariffs; and
Avoid readily dismissing the soft data.
This is a highly uncertain economic situation that calls for humility at the Fed rather than unnecessarily risking its credibility by repeating the horrible communication errors of 2021-22.
Watch Fed Chair Powell speak live here (due to start at 1125ET):
