One thing you have to give Donald Trump credit for is his talent for giving his opponents nicknames that stick. Fed Chair Jerome Powell is no exception. He is now known as "Too Late" Jerome Powell, following a post on Truth Social on April 17 in which the US president threatened to fire him.

Donald Trump is so virulent towards the Fed chief because he wants the Fed to lower interest rates in order to reduce mortgage and credit card rates for Americans and thus stimulate growth.

He reiterated this call on Sunday in an interview broadcast on NBC: "(Powell) should lower them. And at some point, he will. He prefers not to because he's not a fan of mine." He added: "You know, he doesn't like me because I think he's real uptight."

The specter of transitory inflation

Behind this verbal jousting lies an eternal debate for investors: is the Fed behind the curve? The question is always whether the Fed is pivoting at the right time, raising rates when inflation returns or lowering them when an economic slowdown arrives. This question of timing is always key. Allowing inflation to get too far ahead risks having to raise interest rates sharply, thereby stifling growth. On the other hand, waiting too long to cut rates risks acting too late, when recession is already upon us.

However, the Fed's recent track record tends to support Donald Trump's arguments. In the spring of 2021, the global economic recovery following the Covid pandemic put pressure on supply chains and energy prices. These supply constraints are leading to price increases. However, the Fed believes that this will not be sustainable as supply returns to normal. At the time, the Fed spoke of transitory inflation. We know what happened next: price pressures spread throughout the economy, particularly due to tensions in the labor market, and the Fed had to abandon this narrative and begin a cycle of rate hikes starting in July 2022.

The conclusion that everyone now draws from this sequence – and it is always easier to say so now – is that the Fed waited too long and allowed inflation to get out of hand, failing to see that it was not just a supply shock, but also a demand shock (stimulated by several massive stimulus packages from Donald Trump and then Joe Biden). The Fed was therefore behind the curve, and this resulted in inflation soaring to over 9% in the summer of 2022.

Source: Trading Economics

This sequence of events may now legitimize Donald Trump's criticism of Jerome Powell. Last week in Michigan, speaking to supporters gathered for his 100-day anniversary, he even declared, "I know a lot more than he does about interest rates."

Waiting remains the best solution

But if we leave personal considerations aside and get to the heart of the matter, the Fed is currently in a delicate position. The expression used by our Anglo-Saxon friends is "between a rock and a hard place."

On the one hand, fears of recession are very much present. JPMorgan, for example, has raised its probability of recession in the US to 60%, while surveys (of both households and businesses) show that confidence has deteriorated sharply, reaching levels not seen since 2008.

On the other hand, tariffs will lead to price increases. It remains to be seen how large these price increases will be and whether they will spread. The challenge now for the Fed is to keep inflation expectations sufficiently anchored. In concrete terms, this means remaining sufficiently firm and committed to achieving its inflation target so that price increases do not reignite an inflationary spiral.

This is why the Fed is very cautious about cutting interest rates, despite legitimate fears of an economic slowdown. This situation was summed up well by Richard Clarida, Fed Vice Chair between 2018 and 2022: "This is not going to be a cycle where the Fed makes preemptive cuts in anticipation of a slowdown. It will have to be reflected in tangible data, particularly in the labor market."

This is exactly the position Jerome Powell has taken in recent weeks. Last month, at the Economic Club of Chicago, he said that the Fed needed "more clarity before considering any adjustments." In other words, more data clearly indicating that a slowdown is underway. However, for the time being, the hard data remains resilient. This was evident in Friday's employment report.

And we will probably have to wait several more months before it deteriorates. That is why the market is expecting status quo this week, and why the next rate cut is now expected in July, according to the CME's FedWatch tool.

https://www.marketscreener.com/news/latest/Is-the-Fed-late-49843420/