The S&P 500 opened 2% lower on April 21 after finishing last week down 1.5%. Last week’s losses disappointed investors who were hopeful that stocks could continue to build on a bounce-back rally that kicked off when President Trump paused most of the reciprocal tariffs for 90 days on April 9.
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The decline in early action on Monday may be partly due to the ongoing spat between President Trump and Federal Reserve Chairman Jerome Powell.
While Powell has kept his comments related to policy, President Trump has increasingly targeted Powellâs reluctance to reduce interest rates further.
The Fedâs monetary policy switched dovish last fall, with Powell cutting rates in September, November, and December before putting further rate cuts on hold amid growing inflation worry.
Federal Reserve Chairman Jerome Powell struggles to balance his dual mandate of low inflation and unemployment.
The Fed risks falling behind the curve
Powellâs Fed is backed into a bit of a corner.Â
Its dual mandate is low unemployment and inflation, two often competing goals. Raising interest rates can slow inflation but increase job losses, while cutting interest rates can increase hiring but risk faster inflation.
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The dynamic led Powell to say last week, âWe may find ourselves in the challenging scenario in which our dual-mandate goals are in tension.”
A potential rock-hard-place moment for the Fed has Powell increasingly cautious, fearful that cutting or raising interest rates may have severe consequences.
Americans are already pinching pennies because of higher prices over the past three years, and layoffs are rising. While CPI inflation has fallen to 2.4% from above 8% in 2022, it remains above the Fedâs 2% target, and newly instituted tariffs could cause inflation to reignite.
President Trumpâs tariff scheme encourages businesses to move production back to the US. However, import taxes will cause US companies, including retailers, to raise consumer prices or reduce profits.
Job market uncertainty is equally concerning. The unemployment rate has slowly moved back to 4.2% from 3.4% at 2023âs low, and Challenger, Gray, & Christmas reports that the first quarterâs 497,000 layoffs were the most in a Q1 since recession-riddled 2009.
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The economy could tilt into recession if the Fed doesnât prop up the jobs market with cuts. And if the Fed doesnât slow inflation with hikes, the anchor on consumer spending could also tilt us into recession.
A sticky wicket, indeed.
President Trumpâs frustration with Powell mounts
Powell’s hesitancy to cut rates frustrates President Trump, who worries that the tariff’s negative impact on the stock and bond market could cut off key funding necessary to support economic growth.
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This weekend, President Trump said, âIf I want him out, he’ll be out of there real fast, believe me,” in response to a question about Powellâs Fed leadership and rate policy.
On Monday, he referred to Powell as âa major loser.â
âWith these costs trending so nicely downward, just what I predicted they would do, there can almost be no inflation, but there can be a SLOWING of the economy unless Mr. Too Late, a major loser, lowers interest rates, NOW,â wrote Trump on Truth Social.
The insistence that Trump can remove Powell before his term ends next year raises yet another question for investors who generally want clarity and policy stability.
It also runs counter to long-standing Fed independence. Recognizing that the need for price and job stability could conflict with politicians’ desires, the Central Bank was designed to operate independently to avoid the risk of being swayed from its mission.
While Jerome Powellâs comments reinforce Fed independence and its commitment to the dual mandate, Trumpâs increasing disagreement over the direction of rates could create additional market volatility.
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