GF SEC: Powell's dilemma

On April 3, Trump signed an executive order at the White House regarding the so-called "equal tariffs," announcing the establishment of a 10% "minimum benchmark tariff" for all trading partners, while imposing higher tariffs on dozens of other countries and regions on top of the 10%. According to the latest calculations by the Yale University Budget Experiment Lab, the effective tariff rate in the United States has risen to 22.5%, the highest level since 1909. On April 3-4, the US stock market experienced consecutive large declines, reflecting growing concerns about the US and global economy. The non-farm payroll data released on April 4 is the first key economic data following the implementation of equal tariffs, and is relatively important. On the afternoon of April 2, local time, Trump signed an executive order at the White House regarding the so-called "equal tariffs," announcing the establishment of a 10% "minimum benchmark tariff" for all trading partners, while imposing higher tariffs on dozens of other countries and regions on top of the 10%. Among them, the equal tariff rates for the European Union, China, and Japan are 20%, 34%, and 24% respectively. In March, there were 228,000 new non-farm jobs, higher than the expected 140,000 and the previous value of 117,000. The private sector added 209,000 jobs, higher than the expected 135,000 and the previous value of 116,000. The data for January was revised down by 14,000 to 111,000, and the data for February was revised down by 34,000 to 117,000. From this non-farm data, the short-term changes in the US job market are not significant: (1) In March, there were 228,000 new non-farm jobs, higher than the expected 140,000, and there was a certain rebound in employment in consumer-related industries (retail, leisure hotels) which had been weak previously, possibly due to a rebound from the disruptions caused by weather factors in the previous period; (2) The market is more concerned about the freeze on hiring and layoff policies by DOGE, which has not significantly weakened government sector employment; (3) The unemployment rate is still relatively low, with the March unemployment rate (U3) rising slightly from 4.14% to 4.15%. As we mentioned in the previous non-farm report, extreme cold weather and fires led to a significant slowdown in employment in certain industries. The rebound in March data shows a partial recovery in employment in these industries. In March, the construction industry, leisure hotel industry, and retail industry added 13,000 jobs (previously 14,000 jobs), 43,000 jobs (previously -17,000 jobs), and 23,000 jobs (previously -1,800 jobs) respectively. The employment recovery in retail and leisure hotel industries reflects a non-linear decline in consumer spending momentum. The state-level employment data for California on March 17 showed that there were 0 new jobs in January, which was lower than the historical average of 11,000, indicating that the fires did indeed create a one-time disruption to employment, followed by a rebound. Federal government employment remained stable in March, adding 19,000 jobs, compared to an increase of 1,000 jobs previously. Layoffs by DOGE resulted in a decrease of 4,000 new jobs in federal government employment, with a cumulative decrease of 15,000 jobs in February and March. However, the impact of DOGE on local government hiring behavior was limited and offset the weakening of federal government employment. However, considering that in the February JOLTS report, federal government layoffs increased by 18,000 people, while total hires decreased by 5,000 people, we expect more federal government layoffs to be reflected in the April non-farm employment report (to be published on May 2). Household survey data in March also remained stable. The unemployment rate increased by 0.01 percentage points to 4.15%, with an increase of 201,000 employed individuals and an increase of 31,000 unemployed individuals. In terms of reasons for unemployment, new entrants to the labor force and permanently unemployed individuals contributed 0.04 and 0.03 percentage points, respectively, while resignations and completion of temporary jobs contributed -0.03 and -0.04 percentage points to the unemployment rate. Employment conditions have strengthened, with both full-time and part-time employment increasing. Among part-time employees, the number of those working part-time due to economic reasons (financial pressure) decreased. Labor force participation increased by 0.1 percentage points to 62.5%. In terms of age, the labor force participation rate for the 16-24 age group increased from 56% to 56.6%, making a significant contribution. In terms of nationality, the labor force participation rates for foreign-born and native-born individuals increased from 66.4% and 61.4% to 66.8% and 61.5% respectively. However, the data also presents some signs of marginal weakening: (1) The total revisions for January and February's new non-farm jobs amounted to a reduction of 48,000 jobs; (2) The employment diffusion index (reflecting the breadth of employment) decreased, with the overall diffusion index falling from 56 to 54.2, and the manufacturing employment diffusion index falling from 54.2 to 45.1, the lowest level since November 2024; (3) Wage growth continues to slow down. Hourly wages increased by 3.8% year-on-year, lower than the expected 4.0% and the previous value of 4.0%. A more representative wage index, the Index of Aggregate Payrolls Private, saw a year-on-year increase of 4.4% in March, lower than the previous value of 4.8% and the monthly average of 4.8% in 24 years; (4) The impact of federal government layoffs may be evident in the subsequent April non-farm employment report (to be published on May 2). Wage growth remains stable but slowing down. Hourly wages increased by 3.8% year-on-year, expected 4.0%, previous value 4.0%; month-on-month 0.3%, in line with expectations, previous value 0.2%. Durable goods, manufacturing, and retail trade industries saw larger increases in hourly wages. As mentioned in our previous reports, the temporary rebound in hourly wages due to the severe weather in January was temporary, and the probability of a secondary wage inflation is small. The data for February and March confirm this. Wage growth remains stable but slowing down. Hourly wages increased by 4.0% year-on-year, expected 4.1%, previous value 3.9%, month-on-month 0.3%, in line with expectations, previous value 0.4%. Non-durable goods (up 0.7% month-on-month), wholesale trade (up 0.6% month-on-month), and financial industry (up 0.5% month-on-month) saw larger increases in hourly wages. Another more representative wage index is the Index of Aggregate Payrolls Private, which saw a year-on-year increase of 4.4% in March, lower than the previous value of 4.8% and the 24-year monthly average of 4.8%. The Index of Aggregate Payrolls Private combines factors such as employment numbers, average weekly working hours, and average hourly wages. It reflects the labor income in the entire economic system." refers to the total number of jobs, while average hourly wages only show the rate of pay per unit of time, without considering changes in working hours and employment numbers. Therefore, it better reflects the true situation of the job market. Wage growth resilience supports residents' willingness and ability to consume, especially for middle- and low-income groups, mainly relying on current income for their livelihood. Therefore, wage stickiness continues to support consumption and moderate economic growth.From March, the number of federal government officials receiving unemployment benefits has started to rise, and its impact may be reflected in the April non-farm data. On April 4, Powell made a speech, with main points including: (1) the current labor market is roughly balanced; progress has been made in inflation but it has slowed down; (2) the new government has made significant policy changes in trade, immigration, fiscal, and regulatory areas, and the Federal Reserve is evaluating their impact; (3) it is difficult to assess the impact of tariffs at present. However, what can be foreseen now is that the increase in tariffs exceeds expectations, and its economic impact will also be greater than expected, including higher inflation and slower growth; (4) the Fed's policy stance will not be adjusted until there is a clearer understanding of the future prospects. Powell made a speech at the Society for Advancing Business Editing and Writing event on April 4th. First, Powell believes that the current economic data show a combination of solidity and slowing down, the job market remains balanced, inflation is progressing but slowing down, therefore the Fed has more time to wait for clearer signals. Inflation is going to be moving up and growth is going to be slowing. But to me its not clear at this time what the appropriate path for monetary policy will be, and we are going to need to wait and see how this plays out before we can start to make those adjustments. Were well positioned to address whatever may come. And in the meantime, Id say were waiting for greater clarity before we consider adjustments. Second, the new government has made significant policy changes in trade, immigration, fiscal, and regulatory areas, and the Federal Reserve is evaluating their impact. Powell expressed that at present, inflation is still high, coupled with tariffs may lead to a one-time price increase, and the Fed needs to ensure that long-term inflation expectations remain stable. While tariffs are highly likely to generate at least a temporary rise in inflation, it is also possible that the effects could be more persistent. Our obligation is to keep longer-term inflation expectations well anchored and to make certain that a one-time increase in the price level does not become an ongoing inflation problem. Third, the Fed's policy stance will not be adjusted until there is a clearer understanding of the future prospects. In other words, the Fed will continue to patiently wait for signals and will not rush to cut interest rates. Regarding Powell's above statements, our understanding includes: (1) The policy changes in the four areas mentioned by Powell are similar in framework to the four dividends of high nominal growth in the United States that we mentioned earlier (the fiscal expansion dividend, the immigration dividend, the technology company capital expenditure dividend, and the low-cost import dividend). In the short term, the relative stability of U.S. hard data is mainly due to the lagged effects of these dividends, and under the new policies of the Trump administration, these dividends are being disrupted. (2) Tariffs are one of the biggest marginal changes. According to the latest calculations by the Yale University Budget Laboratory after the implementation of the tax cuts, the effective tariff rate in the United States has risen to 22.5%, the highest level since 1909. In the short term, tariffs will raise prices by 2.3%, equivalent to an average household consumer loss of about $3,800 by 2024; and a drag on actual GDP in the fourth quarter of 2025 of 0.87 percentage points. (3) Powell's attitude is somewhat hesitant, if the current data clearly indicate a typical "recession," then cutting interest rates is a logical choice. However, the impact of high tariffs on inflation and long-term inflation expectations is a potential risk that needs to be assessed. The risk of "stagflation" will make the Fed's operations more difficult and will constrain the Fed from making preemptive rate cuts as it did in 2019. Looking back at the U.S. economy from 2021-2024, high nominal growth rates are one of its main characteristics, with the fiscal expansion dividend (the subsidy effect of large-scale fiscal expansion on household consumption expansion), the technology investment dividend (the capital expenditure cycle brought about by the tech boom and the narrative of manufacturing reshoring), and the immigration dividend (the increase in immigrants).The increase in labor force brought by immigration (CKH Holdings labor cost stabilization) is one of the three major dividends, and relatively low-priced imported goods in the context of globalization also help restrain inflation. The current marginal changes (clear intent of fiscal policy contraction, reduced technology investment in economic downturn cycles, reduction in the number of immigrants due to immigration control policies, anti-globalization) are precisely the destruction of the basic logic of these major dividends.We tend to think that uncontrolled fiscal expansion needs to be restrained, but when fiscal expansion and tariff policies occur simultaneously, it will put the Federal Reserve in a dilemma. If current data clearly points to a typical "recession," then a rate cut is a reasonable choice. However, the impact of high tariffs on inflation and long-term inflation expectations is a potential risk that needs to be evaluated. The risk of "stagflation" will make the Fed's operations difficult and will constrain the Fed from taking preventive rate cuts as in 2019. In other words, in the context of high inflation uncertainty, the Fed needs to see substantial economic weakening before taking action, which increases the probability of a recession. If the Fed expresses concerns about economic recession unilaterally, there will be a logic of a "Fed Put" for overseas markets, that is, if the market believes that the Fed will tend to ease liquidity, it will support risk appetite, but this logic has not been triggered yet. Fed Watch data shows a 63.9% probability of a rate cut by the Fed in June, up from 62.8% previously, with limited changes. In the short term, global macro uncertainties include retaliatory tariffs from various countries, liquidity effects and expected effects brought by volatility in overseas financial markets, and corporate caution caused by a decline in commodities. On April 4, the S&P 500 index fell by 5.97%, marking the worst weekly closing record since the COVID-19 pandemic; the Nasdaq index fell by 5.82%, with a decline of over 20% from its February high point, officially entering a bear market. The yield on the 10-year U.S. Treasury bond fell to a low of 3.86% and closed at 3.99% later that day. As of April 4, Fed Watch data shows a 63.9% probability of a rate cut by the Fed in June, up from 62.8% previously. The Bloomberg futures market implies four rate cuts for the whole year, down from 4.5 previously. This means that the market also believes that under the dual goals of inflation and employment, the Fed will focus more on employment data. The yield on the 10-year U.S. Treasury bond rose by 3 basis points to 4.30%. The yield on the 10-year U.S. Treasury bond fell to a low of 3.86% that day, but rose back up to 3.99% due to Powell's hawkish speech. The Dow Jones Industrial Average fell by 5.5%, the S&P 500 index fell by 5.97%, and the Nasdaq index fell by 5.82% that day. Risk warning: The U.S. economy may enter a vicious cycle of weakening consumption, rising unemployment rate, declining corporate profits, further increasing layoff rates, and out-of-control unemployment rate due to a rapid cooling of the employment market. A unexpected weakening in U.S. stocks would have a negative impact on consumption, leading the U.S. economy into a recession. The Fed's unexpected rate hikes lead to a rapid tightening of global liquidity. Escalation of geopolitical tensions may trigger a global re-ignition of inflation. This article is republished from the WeChat public account "Guo Lei Macro Tea House", author: Chen Jiali; GMTEight editor: Yan Wencai.