The U.S. economy may be facing a difficult situation, Powell acknowledges that the Federal Reserve is in a difficult position!

Federal Reserve Chairman Powell warned on Wednesday at the Economic Club of Chicago that the US economy may be facing a difficult situation, with rising inflation and slowing growth simultaneously, which will create a clear conflict with the Fed's policy objectives. "We may find ourselves in a challenging situation where our dual mandate goals of promoting maximum employment and maintaining price stability may be in conflict," Powell said in his speech. "If this situation occurs, we will weigh our policy choices based on how far the economy is from each goal and how long it may take to close these gaps." This statement marks the first time the Fed Chairman has explicitly pointed out in recent remarks that the US economy has entered a stage that may make policy-making difficult. Uncertainty caused by tariff increases is a key variable Powell pointed out that recent changes in US government trade policy, especially President Trump's decision to impose new tariffs, are increasing uncertainty in the macroeconomic outlook. "While we expect tariffs to raise inflation and slow growth, we are currently unsure which aspect should be prioritized." Powell added that although tariffs theoretically function as a tax on imported goods, thereby increasing prices and dampening consumption, the direct transmission mechanism to inflation is not always clear. He emphasized that the Fed is closely monitoring whether short-term inflation expectations will rise, as this will have a crucial impact on the Fed's policy path. According to him, the core personal consumption expenditures (PCE) inflation rate in March is expected to be 2.6%, slightly higher than the Fed's 2% long-term target. In addition, some market-based and survey-based short-term inflation expectation indicators have already risen. "Tariffs are likely to push up inflation in the short term," Powell noted. "Whether these inflation effects persist will depend on the speed and breadth of price transmission, and whether the Fed can stabilize the public's long-term inflation expectations." "Waiting for now" is the current best strategy Despite widespread speculation about when the Fed will start cutting interest rates, Powell did not provide a clear guidance on the future direction of rates in this speech. He stressed, "We are currently in a favorable position to wait for clearer economic prospects before deciding whether to adjust our policy stance." This "wait and see" policy stance is gaining more support within the Fed, especially against the backdrop of recent uneven economic data. Powell mentioned that US GDP growth slowed significantly in the first quarter, with overall consumer spending only showing moderate growth despite strong car sales. At the same time, the drag on GDP from net exports has intensified as businesses rush to import goods before potential tariff increases. He said, "The data currently available indicate a clear slowdown in economic growth in the first quarter compared to last year." It is worth noting that on the same day as Powell's speech, the US Department of Commerce released data showing a 1.4% year-on-year increase in retail sales in March, exceeding market expectations. A significant portion of this growth came from consumers rushing to buy cars to avoid potential tariff impacts. Fed internal response: Financial markets have "changed" On the same day that Powell gave his speech, Cleveland Fed President Mester expressed similar concerns at another forum. "The current trend in financial markets is different from past 'safe-haven' scenarios," Mester said. "We are seeing that while the stock market is falling, long-term Treasury bonds are also being sold off, leading to an increase in yields, which is completely different from the situation where funds flowed into US bonds under previous 'risk-off' sentiment." She pointed out that this pattern of stocks and bonds selling off indicates a significant deterioration in investor confidence, and financial conditions have substantially tightened. Despite a slight decline in the US dollar, overall financing costs are rising, potentially putting pressure on households and businesses. In terms of economic prospects, Mester stated that while "hard data" such as employment and growth performance are still decent, "soft indicators" such as consumer confidence and business expectations continue to weaken, indicating growing market concerns about the future. She specifically warned that the US may face "stagflation," a combination of high inflation, weak growth, and employment. "Tariffs may trigger a chain reaction, and once other countries retaliate, it will further increase inflation pressure while economic activity is limited." On the policy front, Mester, like Powell, leans towards maintaining interest rates at the current stage to observe the changes in data. She said, "The current economic fundamentals do not support a rapid shift, and we need more information before making wise decisions. In the context of pressure on inflation and employment, maintaining monetary policy stability is a reasonable choice. My crystal ball can only see the present for now, and we need to wait and see for the future." Market expectations: Timing of rate cuts may be delayed, pace will slow down The market currently generally expects the Fed to start cutting rates in June and to cut rates three to four times before the end of 2025, each time by 25 basis points. However, the statements by Powell and Mester may prompt the market to reassess this expected path. Analysts point out that unless inflation significantly cools down in the coming months and economic growth slows substantially, the Fed may be more inclined to maintain a "wait and see" stance in the second half of 2024, and even face the dilemma of "to raise or to lower rates" again.