Last week, President Donald Trump told stock market investors that they are on their own. At this week’s meeting of monetary policymakers, Federal Reserve Chair Jerome Powell is expected to make a similar statement.
According to a note by Stephen Brown, deputy chief U.S. economist at Capital Economics, “the upside risks to inflation lead us to think that, despite the recent weakness in equity markets, there is little chance of a ‘Powell put'” in the coming week.
A Powell, or Fed, “put” is the belief that a sharp decline in the stock market would force policymakers to lower interest rates or take other actions to boost the economy.
At least since the October 1987 stock market meltdown, which forced the central bank led by Alan Greenspan to cut interest rates, investors have discussed a hypothetical Fed put. As an insurance policy against a market downturn, an actual put option is a financial derivative that grants the holder the right, but not the responsibility, to sell the underlying asset at a predetermined level, known as the striking price.
In a television interview last Sunday, the president largely dismissed a question about whether his aggressive tariff policies could cause a recession, claiming that the long-term benefits of reworking the trade system would outweigh any concerns that the market was on the verge of a “Trump put.” To put it another way, fear of immediate market or economic repercussions forced economists and investors to reconsider their assumptions that Trump would back down on tariffs or other growth-threatening measures.
As trading partners considered methods to react, Trump resumed his practice of enacting broad tariffs, promising some and giving in on others, leaving the market to plummet. The S&P 500 SPX fell 10% from its previous peak and entered correction territory, joining the Nasdaq Composite COMP for the fourth consecutive week. Before equities witnessed a big Friday comeback, the small-cap Russell 2000 COMP almost fell into a bear market, which starts with a 20% downturn, and the Dow Jones Industrial Average DJIA also approached a correction.
Market observers pointed out that Friday’s recovery occurred on a day when Trump was unusually quiet about trade issues.
Read More : Fed will likely hold rates steady, but ‘bad-news cuts’ in the fall are likely.
Investors are more concerned with the notion that the uncertainty around Trump’s tariffs and other policies is immobilizing firms and, to some extent, consumers, laying the groundwork for a future downturn that could start to hurt earnings, rather than the current economic impact.
Economists Scott Baker, Nick Bloom, and Steven Davis created the widely watched U.S. Economic Policy Uncertainty Index, which has increased to a level not seen since the beginning of the COVID-19 epidemic (see chart below).
In a phone interview, Kevin Gordon, senior investment analyst at Charles Schwab, stated, “I think the nature of the policymaking is much worse than the tariffs themselves, and a lot of companies are starting to say that.” “A lot of companies are starting to say, ‘If there are going to be tariffs, that’s fine – just tell me what they are and don’t change it.'”
According to Gordon, the concern is that companies operating without policy awareness may reduce hiring, spending, and other activities, which could cause the economy to slow down or perhaps enter a recession.
On Friday, the University of Michigan’s widely monitored consumer sentiment index dropped from 64.7 in March to 57.6, a 29-month low.
According to Lauren Goodwin, economist and chief market strategist at New York Life Investments, the selloff in recent weeks has not been fueled by economic fundamentals, such as a decline in earnings or economic statistics, in contrast to the majority of recent significant selloffs. Rather, market fears are being fueled by policy uncertainty, which in turn leads to worries about the outlook for growth.
Market players, according to Goodwin, might take solace in the Fed’s rate-cut prognosis or in Trump’s clarity on tariffs and other policies, including potentially market-positive things like extending corporate tax cuts or deregulation. Trump hasn’t been very inclined to supply that. What about the Fed, then?
Investors have priced in three quarter-point rate cuts in 2025 due to renewed concerns about growth. However, Powell and other authorities face the same uncertainties as investors.
Policymakers find it difficult to determine the effect on inflation or growth when there is little clarity regarding the type of tariff system that is imminent. The Fed’s twin mandate is to maintain full employment and price stability.
“The problem for the Fed is that the partly policy-induced jump in layoffs is set to be accompanied by a policy-induced rise in inflation,” Brown told Capital Economics.
Powell is unlikely to stray much from his current wait-and-see strategy because of this. The Fed chair stated earlier this month that policymakers could afford to wait for greater clarity on the outlook because sentiment readings haven’t historically been a reliable indicator of actual economic activity.
The uncertainty, according to Gordon of Schwab, emphasizes how crucial it is to keep exposure to high-quality equities across all industries or indexes. In this context, quality refers to stocks of businesses that have a track record of profitability and steady earnings growth.
He pointed out that while it may seem apparent, companies with reasonably solid earnings profiles, big cash reserves on the balance sheet, low volatility, and lower foreign exposure risk are typically the ones that investors look to for the most consistent outperformance, even when stocks have been declining.
