Expert: U.S. stocks plunged, but don't count on "Federal Reserve Put" to take effect.

On Monday, the rapid outbreak of trade war by President Trump triggered a brutal sell-off in global financial markets, leading to speculation that the Federal Reserve might intervene to curb losses. However, several Fed observers said not to expect that. With US inflation rates still above the Fed's target and price increases due to tariffs on the horizon, economists and market analysts believe that Fed officials will wait until the impact reaches the real economy before cutting rates. This may take several months to reflect in official data. Morgan Stanley's Chief US economist, Michael Gapen, said on Bloomberg TV on Monday: "If we are not in a recession, the Fed will find it hard to ignore this inflation in the short term. The Fed is likely to stay put in the foreseeable future." Fed officials have a history of taking action to stabilize markets and the economy during times of crisis. This sometimes means emergency rate cuts between scheduled policy meetings to avoid the possibility of a severe recession. The Fed last did this in March 2020 when the US began lockdown measures related to the pandemic. Earlier on Monday, interest rate swaps implied a 40% chance of the Fed cutting rates by 25 basis points before next week. However, investors have since reduced this bet. Nevertheless, current economic data shows that the US economy, while slowing down, remains stable. The March employment report indicated strong labor market performance before the imposition of tariffs, with monthly gains exceeding all expectations. Fed Governor Kaplan said in a speech on Monday in Cambridge, Massachusetts that the impact of tariffs on inflation is more urgent than on economic growth. Chairman Powell suggested on Friday that now is not the time for the "Fed put," even as US household wealth evaporates and economic activity faces real risks. The "Fed put" refers to Wall Street's belief in the Fed's actions to support a stock market downturn. After the famous "Black Monday" stock market crash in October 1987, former Fed Chairman Greenspan cut rates and injected liquidity, leading to the concept of the "Greenspan Put." Each Fed leader has taken other significant measures to address subsequent crises, helping contain market losses and even reverse market trends. No Fed official will admit that the "Fed put" is part of their policy toolbox, but Wall Street has had implicit confidence in its existence for nearly 40 years. Though stock market volatility can affect the economy through changes in household wealth and expectations, Trump's early weeks in office have generated conflicting signals, leaving the Fed unable to choose a specific course of action so far. Apart from interest rates, officials can also use temporary lending arrangements to prevent liquidity shortages from paralyzing credit markets. The Fed took this measure during the financial crises of 2020 and 2008. The markets have clearly been under pressure. Stocks plunged on Monday, with global markets losing about $10 trillion in three days. As investors seek safe havens, US Treasury and Japanese yen prices rose, though US Treasury yields retreated from near highs on Monday, trading lower during the day, raising yields. However, the pains in the financial markets have not revealed liquidity shortages that might prompt Fed intervention. Meanwhile, the Fed's preferred measure of core inflation was at 2.8% as of February, well above the 2% target, and this does not yet include the impact of tariffs. Additionally, an important inflation gauge that Fed officials closely monitor, measuring long-term inflation expectations, has declined for three consecutive months. Former Fed Vice Chair Brainard said this put policymakers in a bind. Brainard said in an interview: "They are going to be hoping for these inflation pressures, which really diminishes their ability to support the labor market before they see any signs of weakness. So it's a real conundrum for the Fed." The stock market downturn and pessimistic outlook for businesses and consumers may indicate a genuine economic slowdown. Some economists suggest that continued tariffs could increase the likelihood of a global economic recession. However, Chairman Powell said on Friday that the Fed would not rush to react to market turmoil, stating that officials have a "duty" to maintain stable inflation expectations. He noted that rates are in a favorable position, giving officials time to assess the impact of Trump's policies on the economy. Powell also said that based on current data, the economy is "still in good shape" and did not mention the ongoing stock market decline. Economist Anna Wong of Bloomberg said: "If the Fed sees signs that it is once again facing the risk of runaway inflation expectations, thenlike in 2022even a 20% decline in the stock market won't stop it from maintaining its tightening policy." One scenario that could prompt the Fed to act is if any signs emerge that key parts of the US Treasury market or other critical segments of the financial system are malfunctioning. But James Knightley, Chief International Economist at ING, said: "Unless malfunctioning markets present any financial stability risks, I don't think the Fed would intervene at this stage." Stanford University finance professor Darrell Duffie pointed out that past research he conducted with NY Fed staff showed that as macroeconomic volatility rises, liquidity in US Treasuries does indeed decline, as it is currently. When traders are overwhelmed by market activity and can no longer play their role as intermediaries, signs of dysfunction that require attention and support will emerge in the market. However, Duffie said this has not happened yet. Some economists say that if these warning signals do emerge, officials may use specific lending tools rather than rates to address them. For example, in March 2020, policymakers introduced an expansive bond purchase program when the US Treasury market froze, and in 2023, they introduced an emergency lending program for banks after the collapse of Silicon Valley Bank. - End -Rightson ICAP's chief economist Lou Crandall said, "If financial pressures worsen, the Federal Reserve's strategy is to address these issues directly, rather than trying to solve everything through interest rates."Others pointed out that the Federal Reserve's ability to alleviate concerns related to White House policies is limited. Brett Ryan, senior U.S. economist at Deutsche Bank, said, "This is not a problem the Federal Reserve can solve. The circuit breaker here is the Trump administration, they have not made concessions, but have doubled down, so you see the market responding accordingly."