Last Friday, Federal Reserve Chairman Jerome Powell delivered his first remarks since Trump unveiled widespread tariffs.
Chairman Powell said the tariffs were "larger than expected". He suggested they could cause slower economic growth. He also predicted they would cause higher inflation but remained unsure whether this would be short-term in nature or longer-lasting.
Last week, US markets capped off their worst week since the pandemic. The S&P 500 index (SP: .INX) fell 9% for the week. The tech-heavy Nasdaq Composite Index (NASDAQ: .IXIC) officially entered a bear market after falling more than 20% from its peak.
Wall Street's 'fear gauge', the CBOE Volatility Index, also spiked to above 45 for the first time since the pandemic.
On the home front, (at the time of writing) futures suggest the S&P/ASX 200 (ASX: XJO) will open 4.3% lower as investors come to grips with the evolving trade war and likely economic consequences. This would wipe a further $114.8 billion off the benchmark.
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What does this mean for US interest rates?
Chairman Jerome Powell spoke about how conflicting economic indicators would likely complicate interest rates decision-making for the Federal Reserve.
Higher inflation and higher unemployment (due to slower growth) would undermine the Fed's mandates of 2% inflation and maximum employment.
This has put the Federal Reserve in a tough spot.
Hard data vs soft data
Slower growth is yet to show up in economic data.
Last Friday, the US March jobs report revealed that 228,000 jobs were added to the economy in March. This was significantly more than the consensus expectation of 137,000. While the unemployment rate ticked up from 4.1% to 4.2%, this is still extremely low.
However, the "soft data" tells a different story. Recent commentary from business leaders suggests a slowdown is coming.
Commenting on this contrast, Chairman Jerome Powell said:
"We are closely watching this tension between the hard and soft data. As the new policies and their likely economic effects become clearer, we will have a better sense of their implications for the economy and for monetary policy."
Upcoming key dates
No doubt, investors will be closely watching the next US inflation print, which is due to be released on 10 April.
The Federal Open Market Committee (FOMC) is due to meet next on 6-7 May. Investors will be laser-focused on the outcome. Chairman Jerome Powell's post-conference remarks will also be closely analysed.
According to CNBC, traders are now betting the Federal Reserve will cut interest rates at least four times this year amid fears the US could enter a recession. In March, the Federal Reserve opted to leave the Federal Funds rate unchanged at 4.25-4.5%.
