The March Meeting
In the March announcement and subsequent press conference, Chairman Jerome Powell’s stance was a familiar one. The Fed was prepared to increase or decrease rates in response to higher inflation or a weakening labor market, should either arise. If there was a bottom line to his position, it was one of cautious optimism, based on the fact that the U.S. economy was ‘still solid’.[2]
The Fed meeting minutes show a somewhat more divergent picture, with officials still apparently digesting the Trump administration’s unpredictable tariff maneuvers with Canada and Mexico. The Fed’s revised forecast reflects this unease, showing higher inflation (2.5% ->2.7%) and lower growth (2.1%->1.7%) compared to December’s forecast.[3]
Liberation Day and its Aftereffects
Following a series of high-profile tariff announcements on “Liberation Day”, the administration’s strategy of applying negotiation pressure has introduced additional volatility to the markets. In a repeat of the March strategy, the majority of tariffs were subsequently put on hold, apparently to give affected countries time to come to the negotiating table.[4]
Keeping one’s opponents off balance appears to be a core part of Trump’s ‘art of the deal’ and, judging by the markets, which have described an inverse parabolic arc in reaction to the news, it is certainly achieving its goal.
Powell, in a question-and-answer session on April 16, was clearly not in a position to stay silent. While acknowledging the continued stability of the economy, he foresaw that the U.S. would likely soon be ‘moving away’ from achieving the two goals of lower inflation and stable employment, thanks to the recent changes in trade policy.[5]
President Trump’s response, in which he hinted that Powell should cut rates or risk termination, and the subsequent softening in tone, were exactly in line with his tariff strategy.[6]
The Numbers
At 4.2%, unemployment is still low by historic standards, implying that the economy is in good health, so far.[7] The latest inflation data also shows no cause for alarm, although it’s also not clear that there is cause for celebration yet.
On the one hand, the latest Headline CPI figures show a substantial drop for February, with annualized inflation declining from 2.8% to 2.4%, the lowest reading since 2021.[8] On the other hand, Core PCE, arguably the most important measure from the Fed’s perspective, rebounded slightly to 2.8%, still some way above the 2% target.[9]
Big picture, a lot of progress has been made since 2022, but the recent data suggests this progress has somewhat stalled in the last six months.
Critics of President Trump’s trade moves, Powell included, believe that the sudden moves on tariffs risk edging the U.S. economy towards a stagflationary environment, where growth slows as inflation rises. The worst possible outcome from the Fed’s perspective.
Add further uncertainty on immigration, fiscal policy, and regulation into the mix, and you have the current situation: a lot of angst, at risk of crystallizing into real economic pain.
Conclusion
Being a successful investor requires knowing when to follow the crowd and when to hold firm. Consequently, the success of an investing strategy often comes down to how one behaves at times of general market stress, when emotions are running at their highest.
It is easy to be swayed by headlines and trenchantly worded editorials, but it is also good to bear in mind that there are far fewer people who understand the current situation than those who claim to, and that no one can predict geopolitics with 100% accuracy.
When nothing is clear, it is best to avoid grasping for certainty. The waiting game, while not easy, is statistically a more successful approach, especially if you are starting with a solid, long-term-oriented financial plan.
Periods of heightened uncertainty reaffirm the importance of maintaining a diversified investment approach, including exposure to less correlated asset classes, to navigate the unpredictable terrain ahead.
[7] Bureau of Labor Statistics