After a volatile start to the week in the US, financial market nerves appear to have calmed somewhat on signs of some pragmatism emerging from the White House, on tariffs and on the potential for President Trump potentially attempting to fire Federal Reserve (Fed) Chair Jay Powell, with Trump calling for the Fed to cut rates while Powell spoke negatively the impact of tariffs on the US economy and the outlook for monetary policy
Jay Powell said last week that President Trump’s tariffs are “likely” to put at risk the Federal Reserve’s goals of keeping prices and unemployment in check. Powell told the Economic Club of Chicago that “the Administration is implementing significant policy changes and particularly trade is now the focus. The effects of that are likely to move us away from our goals.” Powell said the tariffs announced so far had been “significantly larger than anticipated” and the “same was likely to be true of the economic effects, which will include higher inflation and slower growth”. Powell noted the labour market was still in “a really good place” but warned on the need to “keep longer term inflation expectations well anchored” and to make certain that a one-time price increase [from tariffs] “does not become an ongoing inflation problem”.
Powell’s speech appeared to have upset the President, who said the end of Powell’s tenure “cannot come soon enough” and posted on social media that the Fed Chair was “always TOO LATE AND WRONG” and the White House would “continue to study its options” to remove Powell. While Powell was appointed by Trump during his first term in office, it is clear that with inflationary risks from tariffs on the horizon, Powell, who is one of 12 members of the Fed’s monetary decision-making committee, is minded to ‘wait and see’ rather than cut rates as we’ve seen from the European Central Bank, where the economic and inflation backdrop is much softer. Over the weekend, Trump continued to muse on the future of Fed Chair Jay Powell, calling him a “major loser” and saying “I’m not happy with him. I let him know it. And if I want him out, he’ll be out of there real fast, believe me”. US markets, which were open on Monday while the rest of us enjoyed the Easter break, sold off further, with concerns increasing that undermining the independence of the Fed would further dampen confidence in US assets. By Tuesday evening, Trump’s tone had shifted. Firing the Fed Chair would be a legal minefield, but from a market’s perspective, meddling with the Fed leadership would further unsettle fragile confidence, and we saw signs of that in Monday’s trading. On Tuesday evening, Trump said he had “no intention of firing” the Fed Chair, adding “the press runs away with things. No, I have no intention of firing him. I would like to see him be a little more active in terms of his idea to lower interest rates”.
We also heard more positive comments on potential trade deals with both the EU and China over recent days. President Trump said that the current level of 145% tariffs on China would eventually “drop substantially”, albeit “not to zero”. Treasury Secretary Scott Bessent was reported to have told a private event that the stand-off with China was “unsustainable” and he expected a “de-escalation”. Trump’s tone on Europe was also softer, who said there would “100 per cent” be a trade deal with the EU following a meeting with Italian Prime Minister Georgia Meloni in Washington. Despite saying the EU was “ripping off” the US, Trump said of a trade deal “they want to make one very much, and we’re going to make a trade deal, I fully expect it and it’ll be a fair trade deal”.
A lot needs to happen in the coming weeks however given the complexities of trade deals, and the fact that the US will be negotiating on several fronts, progress will not be simple. Initial talks between the EU and US saw the EU trade envoy Maroš Šefčovič saying he left the talks “struggling to determine what the US was aiming for”. China, meanwhile, has denied talks are even happening, with Commerce Ministry spokesman He Yadong saying yesterday that “any reports on development in talks are groundless” and saying the US “should respond to rational voices… and remove all unilateral tariffs imposed on China if it really wants to solve the problem”. Historically, it has taken the US 18 months to negotiate a trade deal and a further 45 months to implement it so trying to negotiate with 90 countries at one time appears quite overwhelming. That means that either we see some headline grabbing ‘deals’ done with promises made to the US and tariffs reduced accordingly, or this is a long drawn-out process which increases the probability of significant harm to the global economy, and the US in particular.
Which brings us nicely on to the International Monetary Fund (IMF), who opined on the impact of tariffs in their latest ‘World Economic Outlook’ published this week. The IMF sharply lowered their global growth forecast for 2025 and 2026, warning the outlook could worsen if President Trump’s tariffs spark a global trade war. The global growth forecast for 2025 was cut from 3.3% to 2.8% and growth for 2026 was cut to 3.0% from 3.3%. The IMF said the trade war will be a “supply shock” for the US economy, driving up prices and lowering productivity, with effective tariff rates at levels unseen for a century. Chief Economist Pierre Olivier Gourinchas said “the global economic system that has operated for the last 80 years is being reset… the risks to the global economy have increased and are firmly to the downside”. Gourinchas also noted a need to recognise that decades of deepening economic ties had “fostered rapid but uneven economic growth” and in many advanced economies an “acute perception that globalisation unfairly displaced many domestic manufacturing jobs”. The US is predicted to grow 1.8% this year and 1.7% next year, from previous forecasts of 2.7% and 2.1%. China’s 2025 forecast was cut from 4.6% to 4.0%. Eurozone cut from 1% to 0.8%. The IMF noted growth prospects would “improve immediately” if trade tensions eased but the near-term risk is of further escalation with detrimental consequences for economic growth. There are risks that “financial conditions could tighten further as markets react negatively to the diminished growth prospects and increased uncertainty”. The IMF noted that while banks remain well capitalized overall, “financial markets may face more severe tests” and “global financial stability risks have increased significantly”.
The IMF’s forecasts, like everyone else’s, are based on a set of what can only be loose assumptions around the duration and depth of US tariffs. While President Trump is talking up the prospects for ‘deals’ the longer the current situation endures, the more damage it will cause. As noted by Treasury Secretary Scott Bessent, the de-facto trade embargo on China is unsustainable. Positive noise around trade deals will need to be replaced by concrete agreements before too long, though as noted above, the potential for detailed agreements rather than just high-level promises and tariff reductions is low given the timescales involved.
All the same, any de-escalation will be welcomed in financial markets. Indeed, market positioning and survey data is extremely weak, meaning there are some upside risks if we see further concessions from the US or we see any positive surprises from trade talks, if they take place and reach definitive conclusions.
Source: Columbia Threadneedle Investment as at 24 April 2025.
