Larry’s Note: You can now tune in to my new premarket podcast, Trading With Larry Live, on Monday through Thursday each week. It’s free to watch, and you’ll learn what I’m keeping an eye on for the day ahead… areas of the market showing interesting activity… and much more.
Simply head to tradingwithlarry.com at 8:30 a.m. ET to watch!
President Trump is coming after Federal Reserve Chair Jerome Powell yet again.
This time, Trump called Powell a “fool” and stated that he “doesn’t have a clue.”
That follows the Fed’s latest rate-setting meeting. The central bank decided to leave interest rates unchanged at 4.25%-4.50%.
That leaves the U.S. rate at the highest level among the world’s major central banks.
Despite the pressure from the White House to start cutting, Powell fell back on a message he’s used recently.
He stated that the Fed can afford to wait and see how tariffs impact the economy. Powell acknowledged the risk that tariffs pose. But he also said the economy is resilient and in good shape.
But the growth outlook is deteriorating. And as it does, the Fed will have to make some thorny decisions…
The Growth Outlook Is Deteriorating
The average tariff rate now stands at 25%. That’s the highest since 1905.
As tariff talk and trade wars hit the news headlines, consumer moods are souring.
A consumer sentiment measure from the University of Michigan dropped to 52.2 in April. That was the fourth-lowest level on record going back to 1952.
Now there’s growing evidence that tariffs are hitting other economic data.
Gross domestic product (GDP) is a broad measure of economic activity. It fell into negative territory for the first time in three years. GDP fell by an annualized rate of 0.3% during the first quarter.
And the growth outlook is dropping. In fact, the International Monetary Fund (IMF) now projects that tariffs will hit the U.S. economy the hardest.
The IMF cut U.S. growth estimates in 2025 by the most of any large economy, as you can see below:
Under normal circumstances, the Fed might cut interest rates to support growth.
But right now, the Fed has little choice but to keep interest rates high.
That’s because the emerging inflation problem is backing the central bank into a corner.
|
Tune in to Trading With Larry Live
Each week, Market Wizard Larry Benedict goes live to share his thoughts on what’s impacting the markets. Whether you’re a novice or expert trader, you won’t want to miss Larry’s insights and analysis. Even better, it’s free to watch. Simply visit tradingwithlarry.com at 8:30 a.m. ET, Monday through Thursday, to catch the latest. |
Inflation Ready to Surge
The Fed must pursue price stability and full employment. It achieves price stability through low inflation. Full employment indicates a strong economy.
Yet questions are arising about the economic outlook as the trade war drags on.
The Fed has an inflation problem on its hands… even if officials try to downplay the situation.
During his press conference last week, Powell characterized inflation as “moving sideways at a fairly low level.”
But here’s the thing. Even though consumer inflation has trended sideways for the past couple of months, it remains well above the Fed’s 2% target.
Core Personal Consumption Expenditures (PCE) inflation, which tracks consumer prices, was 2.6% in March.
And it could get worse in the months ahead. That’s according to the Fed’s own research reports.
The Fed has districts across the U.S. Each district tracks economic data and surveys businesses within its respective territory.
Key districts with a large manufacturing base are seeing inflation pick up quickly. They can see it in surveys that ask about “prices paid.”
When manufacturers pay higher prices, that tends to lead to changes in inflation.
Both the Philadelphia and New York districts are seeing their prices paid measure at the highest level since the summer of 2022. Back then, core PCE was running at 5.3%…double today’s level. That means we could see higher core PCE figures in the months ahead.
Coupled with a worsening growth outlook, it’s a worst-case scenario for a Fed tasked with balancing inflation and employment.
So even though it may be tempting to think that things are going fine, we need to stay cautious as we maneuver through these shifts in the U.S. economy… which will sway the stock market in 2025 as well.
Happy Trading,
Larry Benedict
Editor, Trading With Larry Benedict
|
Free Trading Resources Have you checked out Larry’s free trading resources on his website? It contains a full trading glossary to help kickstart your trading career – at zero cost to you. Just click here to check it out. |