Powell: In A Pickle of His Own Making

More Market Volatility Ahead

“Watch the Trump - Powell interaction. More drama ahead!” warned SriKonomics on April 5. Markets did not have to wait long. As the European Central Bank cut its policy rate on Thursday by a quarter point — largely responding to the impact on regional growth of the US tariffs — President Donald Trump wrote on Truth Social that “Powell’s termination cannot come fast enough.”

At issue is whether the President has the right to fire supposedly independent agency heads. “The President should not be forced to delegate his executive power to agency heads who are demonstrably at odds with the administration’s policy objectives,” Solicitor General D. John Sauer told the Supreme Court a few days ago, and the top Court in the nation may eventually have to weigh in on whether Federal Reserve Chairman Jerome Powell can continue in his position until his term ends in May 2026.

The President was irked by Powell’s assertion Wednesday at the Economic Club of Chicago that tariffs had heightened inflationary expectations and made it difficult for the central bank to cut interest rates. “Starting on day one, we will end inflation and make America affordable again, to bring down the prices of all goods,” candidate Trump had promised last August. By contrast, “Both survey- and market-based measures of near-term inflation expectations have moved up significantly, with survey participants pointing to tariffs,” Powell said in Chicago on Wednesday..

“If the ECB can cut interest rates, why not the Fed?” appears to summarize Trump’s point of view.

Having already lowered the Federal Funds rate by one percentage point between last September and December including a 50 basis point reduction in September just weeks before the Presidential elections, Powell simply does not have the ability to respond positively to Trump’s demand. The Powell rate cuts had come despite Trump making clear his intention to raise tariffs if elected President. Inflationary expectations had already picked up after last year’s policy easing, and the Trump tariffs are likely to increase price pressures further during the months to come.

Although a read of the legal statutes appears to suggest that a Fed Chairman cannot be fired except for cause, the President is said to have looked for ways to relieve Powell of the post. As for Powell, he has repeatedly emphasized at press conferences that he cannot be dismissed except for cause, and not complying with Presidential demands to ease monetary policy cannot be one of the causes!

Meanwhile, there was no sign that the tariff war between the United States and the rest of the world is ending. For instance, Bloomberg News reported that the European Union is considering imposing restrictions on specific exports to the United States if tariff-related talks with the Trump administration fail. Similar to China’s recent restriction on export of rare earth minerals — critical for computer chips and automobiles — of which China is a key global producer, EU restrictions could be imposed on the region’s exports that are crucial for specific US sectors.

Such developments suggest that there may be no quick end to the trade war and that the inflationary impact of tariffs would not be a one-shot event but a sustained process. This is the reason for SriKonomics suggesting in recent issues that the Federal Open Market Committee does not face a choice just between standing pat on rates or reducing the Federal Funds rate further. As inflation accelerates, the key decision for the FOMC will be the extent to which it should increase interest rates. That is why the Trump - Powell debate is unlikely to end soon but, instead, will continue to add to volatility in financial markets.

Such considerations fed into the drop in the S&P 500 index after the Powell speech on Wednesday. All three major equity indexes had a losing week with the interest-sensitive NASDAQ index declining by 3.9%. The yield on 10-year Treasurys dropped from 4.42% at the start of the week to 4.33% due to increasing expectations of the US economy slipping into recession.

What comes next? It appears unlikely that China will soften its position on retaliations despite the hit to its domestic economy that will be manifested in economic growth figures for the current quarter. Nor will the European Union which is the second largest global entity in terms of gross domestic product, according to World Bank calculations. China, which closely follows the EU, has already set tariffs at such a high level that it could choke off US imports.

Assuming President Trump does not relent, the global economy appears set for a continuation of the trade war, slower growth and higher inflation.

Dr. Komal Sri-Kumar

President, Sri-Kumar Global Strategies, Inc.

Santa Monica, California

srikumar@srikumarglobal.com

@SriKGlobal

April 19, 2025

Sri-Kumar Global Strategies, Inc. advises multinational investors and sovereign wealth funds on global risk and opportunities. Dr. Sri-Kumar is regularly featured on business TV and Radio media, and is a frequent speaker in global financial centers on major topics that affect markets and investments.

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