Author: Wall Street News

Powell ignited the best "Feder Resolution Day".

On Wednesday local time, after the Federal Reserve lowered its economic expectations this year and raised its inflation expectations, Powell expressed his "indifference" to economic risks, and once again threw out the "temporary theory of inflation", revealing his "firm" position to maintain the status quo.

Analysts believe that his "careless" attitude towards US economic risks has had a significant impact on market sentiment, and he seems to be "specially appeaseing the financial market."

Urgently, Powell's subtle posture, rare stocks and bonds in the U.S. market rose overnight.

The S&P 500 index and Nasdaq rose by more than 1%. S&P set its best performance in the "Feder Resolution Day" since July last year. The 2-year US Treasury yield once plunged by more than 10 basis points, and the 10-year US Treasury yield fell by more than 4 basis points, setting a new daily low.

Spot gold prices hit record highs for two consecutive days, with Powell approaching $3,052 during the press conference.

In summary, almost all asset classes have recorded an increase except the US dollar.

It is worth noting that Powell's "temporary theory of inflation" reminds people of the Fed's slow response to the epidemic-driven surge in inflation. Whether this strategy can work is undoubtedly the focus of the current market attention.

Powell insisted in 2021 that inflation was only "temporary", and it turned out to be a costly misjudgment. Inflation at that time not only did not subside for a short time, but soared to its highest level in 40 years, forcing the Federal Reserve to raise interest rates significantly in the later period to control prices.

The difference is that this time Powell emphasized more uncertainty, and the word he emphasized the most at this meeting was "uncertainty". When Fed officials start to emphasize “uncertainty,” it usually means they are leaving room for the turn.

The Federal Reserve slowed down its balance sheet from April on Wednesday, March 20, Eastern Time, the Federal Reserve announced after the Fed's monetary committee FOMC that the target range of the federal funds rate continued to remain unchanged from 4.25% to 4.5%.

This is the second consecutive currency meeting of the Federal Reserve decided to suspend interest rate cuts. The Fed raised interest rates by 525 basis points from March 2022 to July last year, and cut interest rates for three consecutive meetings since September last year, with a total drop of 100 basis points.

At the same time, the Federal Reserve announced that it will slow down the pace of balance sheet reduction (balance sheet reduction) from April. This is the first time the Fed has adjusted its balance sheet since June last year. From June 2022 to the end of last year, the Federal Reserve has reduced its balance sheet by nearly $2 trillion.

The interest rate forecast dot chart released by the Federal Reserve after this meeting shows that Fed officials, like at the end of last year, are still expected to cut interest rates twice this year.

Worries about stagflation and tariffs remain

In terms of economic and inflation prospects, the Federal Reserve also lowered its economic growth expectations and raised its inflation expectations, which once again triggered concerns about stagflation.

The Federal Reserve expects inflation to rise from the current 2.5% to 2.7% at the end of the year, which is still far higher than the Federal Reserve's 2% target; it lowers its GDP growth forecast this year from 2.1% to 1.7%, a significant slowdown from the level close to 3% in 2022 and 2023. After the Fed's resolution was announced, Nick Timiraos, a senior Fed reporter known as the "New Fed News Agency", commented that the Fed has extended the time to suspend interest rate cuts this time, and the economic outlook is bleaker than before. Fed officials expect inflation and unemployment rates to be higher this year than before, reflecting the possible impact of tariffs. He pointed out that almost all Fed officials expect economic growth to be at a downside risk and believe that unemployment and inflation expectations are at an upside risk.

Sam Stovall, chief investment strategist at CFRA, said in a report that FOMC is in more sticky inflation and growthThe slow swing is likely to stem from uncertainty about future tariffs, especially the reciprocal tariffs Trump plans to discuss on April 2.

" Stocks and bonds did not initially react to the news because the market realized that the 'contradictory' economic forecasts were likely the Federal Reserve hinted that it needed more clear information to adjust the currency."

Powell "put out the fire" to economic anxiety and appeased investors

Powell comforted investors at a press conference, hinting that the Federal Reserve felt it was not necessary to take fierce action under the tariffs and their impact on inflation.

He said, "At present, we do see quite solid (economic) hard data, employment growth is "at a healthy level" and unemployment rate is "very close to its natural level", which shows that the US economy is "healthy".

Powell acknowledged that the risk of a recession may have increased in recent months, but he tried to appease the outside world, pointing out that the possibility of a recession is still low.

Asked how much of the Fed's inflation hike is caused by tariffs, Powell replied that it is difficult to analyze to what extent inflation is driven by tariffs, and the "benchmark" forecast is still the "temporary" impact on inflation.

"Sometimes, if inflation disappears quickly without taking action, if it is transitory, it is suitable to ignore inflation. The situation with tariff inflation may be the case. I think it depends on whether tariff inflation can be quickly overcome." He pointed out that if long-term inflation expectations can be controlled well, the Fed can ignore one-time shocks like tariffs. Long-term inflation expectations are now stable, so the Fed can ignore it.

He said that during Trump's first presidency, the impact on inflation was temporary.

Powell's press conference speechDuring the conversation, US stocks rebounded at a faster pace, the three major US stock indexes hit a new high, US Treasury prices jumped, and the yields of two-year US bonds plunged and fell by 4.0%. Gold hit a new high, cryptocurrency rebounded, and the US dollar narrowed its intraday gains. Kathleen Brooks, research director at London XTB, commented that Powell’s controversial reuse of the term “temporary” to describe expectations of tariff-induced inflation, indicating that he “seemingly pacified the financial markets”:

"This is not Powell’s ‘at all costs’ moment, but his indifference to U.S. economic risks had a significant impact on market sentiment.”

"This is not Powell’s ‘at all costs’ moment, but his indifference to U.S. economic risks had a significant impact on market sentiment.”

UBS analyzed that Powell's performance gave them a hint of "Powell put options", and his position was more dovish than the market expected.

In UBS's view, the Federal Reserve is currently paying more attention to economic growth than inflation risks, and believes that excessive attention to inflation caused by tariffs may have unnecessary negative impacts on economic growth.