March 2025
It’s been just over three months since Donald Trump was inaugurated as President and he has so far avoided significant criticism of Fed Chairman Powell. But everyone knew it was coming! It finally came on Thursday April 17th when Trump messaged that “Powell’s termination cannot come fast enough,” followed by Powell “is always TOO LATE AND WRONG.”
While he didn’t directly cite the catalyst for his ire, the obvious culprit was Powell’s speech to the Economic Club of Chicago the previous day in which he said there’s a “strong likelihood” that tariffs would cause consumers to face higher prices and that unemployment would rise, at least in the short run.
He went on to say that the circumstance would create a “challenging scenario” for the central bank because “anything it does with interest rates to address inflationary pressures could worsen unemployment, and vice versa.” “It’s a difficult place for a central bank to be, in terms of what to do.”
The interview was unusually candid, especially for a Central banker. Powell described the challenge the committee faces as being similar to that of a soccer goalie prior to a penalty kick. They will be forced to decide to drive left or dive right in their decision to fight rising inflation or rising unemployment. They can’t do both.
When the discussion turned to the President’s desire to replace him, he responded that he didn’t think he had the authority to do so but added that “It’s a situation we’re monitoring very carefully.”
None of the President’s recent actions or threats have been a positive development for the capital markets. Since the first of the year, the two-year Treasury note has vacillated between a yield-to-maturity rate of 4.38% and 3.65%. Similarly, the 30-year bond YTM has ranged between 5.00% and 4.40%. The S&P 500 is approximately 15% off the all-time high touched on February 19th and the implied volatility VIX (also known as the fear gauge) has been elevated and traded as high as 60%. Under normal circumstances the VIX typically trades around 15%.
While the capital markets have been in flux over fears of what may happen to the economy soon, the actual data has been somewhat sanguine so far this year. Last month’s employment report showed that the economy added 228,000 new jobs and the unemployment rate registered 4.2%, higher than the 3.4.% reached last year but still, arguably at a level that can best described as full employment.
The consumer price index for March came in at 2.4% year-over-year, well off the record 9.1% touched in 2022. Taken tougher, one could deduce that the Fed has achieved a soft landing and that the economy is balanced. However, the markets are looking to the “soft” survey of consumer confidence and purchasing manager surveys which are plumbing new depths as consumers and producers alike worry about the prospect of a recession. Indeed, most Wall Street economic departments have boosted the probability of a recession to over 50%. Moreover, we have just entered the corporate profit reporting period for Q1, and many companies have tempered their forecast due to the uncertain surrounding economic policy.
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