The Breakdown - The Fed Is Stuck Waiting While the Trade War Reshapes the Economy

Episode Date: May 9, 2025

The latest FOMC meeting resulted in zero policy changes as the Federal Reserve adopts a cautious "wait and see" stance amid rising economic risks. NLW analyzes Chair Powell’s careful positioning, balancing uncertainty around trade-induced inflation and employment pressures. Plus, the evolving trade landscape: negotiations intensify with China, the UK deal looms, and the U.S. administration signals it's reshaping global economic order—not just settling trade disputes. Enjoying this content? SUBSCRIBE to the Podcast: https://pod.link/1438693620 Watch on YouTube: https://www.youtube.com/nathanielwhittemorecrypto Subscribe to the newsletter: https://breakdown.beehiiv.com/ Join the discussion: https://discord.gg/VrKRrfKCz8 Follow on Twitter: NLW: https://twitter.com/nlw Breakdown: https://twitter.com/BreakdownNLW

Welcome back to The Breakdown with me, NLW. It's a daily podcast on macro, Bitcoin, and the big picture power shifts remaking our world. What's going on, guys? It is Thursday, May 8th, and today we are talking FOMC Day. Before we get into that, however, if you are enjoying the breakdown, please go subscribe to it, give it a rating, give it a review, or if you want to dive deeper into the conversation, come join us on the Breakers Discord. You can find a link in the show notes or go to bit.ly slash breakdown pod. All right, friends, back with a bit of a macro update today. We have kind of blissfully not had to cover that much macro this week.

There's been plenty of crypto stories. But we did have an FOMC meeting. There are things going on with trade deals. So count this as our catch-up for the week. And the TLDR of this is that risks are rising in the economy, but the Fed is in wait and C mode. In fact, yesterday was one of the quietest Federal Reserve meetings of the cycle. Rates were held steady.

There was no announcement of a change to the quantitative tightening policy. basically this was a meeting with zero policy change and barely even a change in guidance. The only material change to the policy statement, in fact, was a recognition that, quote, risks of higher unemployment and higher inflation have risen. Essentially, the committee sees both sides of their mandate at risk of deteriorating at the same time. With that framing, it seems the Fed isn't waiting because they're satisfied that policy is appropriate over the medium term. They're paralyzed until hard data tells them which direction to move.

In other words, they're just stuck waiting for the next year to drop. Powell reinforced this sense of uncertainty of what comes next at the press conference, stating, we may find ourselves in the challenging scenario in which our dual mandate goals are intention. What looks likely given the scope and scale of the tariffs is that we will see higher inflation and higher unemployment. He said that if this occurs, the Fed will consider how far the economy is from each goal and the time horizons for each to return to target. At the same time, Paul insisted, quote,

for the time being, we're well positioned to wait for greater clarity before considering any adjustments to our policy stance. Steve Leishman of CNBC immediately challenged Powell on this point once questions began. He asked, are you any closer now to deciding which side of the mandate is going to need urgent care first? Powell didn't push back on the idea that some part of the economy is going to need urgent care, but instead commented, I don't think we can say which way this will shake out. There's a great deal of uncertainty about where tariff policies will shake out and the implications for growth and employment. Leishman suggested this sounds like a long-term process before the Fed knows how to act on the data.

Powell added, I don't think we know. Look at where we are today. If you look through the distortions to Q1 GDP, you've still got an economy that looks like it's growing at a solid pace. The labor market appears to be solid, inflation's running just a bit above 2%. It's an economy that's been resilient and is in good shape. Unsurprisingly, the Fed is heavily discounting the volatile economic data that came in over the past month. We saw strong jobs but weak job openings, inflation data cooling slightly, and manufacturing surveys diving rapidly. The big data print that got everyone's attention was GDP falling precipitously into the negatives for Q1, but this was driven largely by a surge in imports to get ahead of the tariffs

which subtracts from GDP. Powell commented, We think that leaves us in a good position to wait and see. We don't think we need to be in a hurry. We're going to be watching the data, which might move quickly or slowly, but we're in a good position to wait for things to evolve. Nick Timmeros of the Wall Street Journal pressed Powell on the idea that there isn't much reason to think inflation will come roaring back. He pointed to falling energy costs and moderate wage growth, suggesting the only inflation risk is the tariff shock driving up goods prices. Powell responded, there's just so much that we don't know and we're in a good position to wait and see, and we don't have to be in a hurry. The costs of waiting to see further are

fairly low, so that's what we're doing. Trying to elicit some forward guidance, Timrose asked if a policy move could be appropriate as soon as the next meeting in June. Powell declined the opportunity stating, we're comfortable with our policy stance. We think we're in the right place to wait and see how things evolve. Powell said wait and see just five times during that answer, so that seems to be the only guidance he's willing to offer. Responding to what it will look like, once the Fed finally does decide to act, Powell insisted that the Fed has a record of, quote, moving quickly once that's appropriate.

It will surprise you not at all that that is not my read on the Fed's reputation, which I think is much more likely to be seen as always being criticized for being late. We even had the president referring to Powell as Mr. Too Late last month. To be fair, this lateness and monetary policy is partly by design. The Fed decisions rely on backwards-looking data and rarely sees the central bank acting in anticipation of shocks. Powell actually gave the example of the 2019 cuts, claiming that they were preemptive, although he acknowledged that last year's cuts were, quote, if anything, a little late.

Powell claimed that in 2019, the Fed cut three times as the economy began to weaken. Once again, not exactly the way I remember it, with the Fed forced to conduct emergency liquidity operations to tame a spike in the repo market, but Powell's point was that with the inflation rate stable at 1.7 percent, they had the luxury to act preemptively before the economic slowdown was clear in the data. That is a luxury they don't have in the the current high inflation environment. And really the rest of the press conference can be summarized by Powell's phrase of the day, wait and see. Powell made the point that the Fed is targeting long-term inflation expectations rather than short-term price increases, implying that we're

unlikely to see emergency hikes in response to tariffs. The underlying issue is that the inflation and employment mandates could come into conflict, with Powell commenting, we haven't faced that situation in a very long time. Powell's only guidance was that, quote, there are cases where it would be appropriate for us to cut this year, there are cases in which it wouldn't. Until we know how this is going to settle out, I couldn't confidently say that I know what the appropriate path would be. In other words, ding, ding, ding, wait and see. To be fair, looking outside of Powell's press conference, there is a growing sense that the Fed just has no good options. In the Wall Street Journal earlier this week, Nick Timoros wrote,

the haphazard rollout of President Trump's tariff policy threatens to put the Federal Reserve in a lose-lose scenario, navigate a recession or manage a period of stagflation. Essentially, the ball is completely in the administration's court for the time being. Whether the inflationary effects or the slowdown in economic growth or the primary impact of tariffs, the Fed is not budging until it's obvious how they should act. Analysts and markets now think that that moment might not come until July. Cleveland Fed President Beth Hammock recently said, I would rather be slow and move in the right direction than move quickly in the wrong direction.

Claudia Assam, chief economist at New Century Advisors and former Fed staffer said, I think generally when we watch the Fed, they have much less of the Masters of the Universe vibe going right now. This Fed is very much at the whim of policies coming out of the White House. They're reactive. With the Fed taking a back seat then for the moment, macro analysis hinges on the trade war. As soon as Powell got done speaking, President Trump stepped in to reassure the market, announcing a quote big news conference for the following day. He claimed this would concern a major trade deal with a big and highly respected country, the first of many. This is still in the future as I record, but it appears that it's going to be

with the UK. Still, even without this new major trade deal, we've had a lot of headlines over the past week suggesting trade negotiations are moving along. On Tuesday, the Chinese embassy posted, based on full consideration of global expectations, China's interests, and the appeals of the U.S. business community and consumers, China has decided to agree to engage with the U.S. side. Talks are scheduled to be held this weekend in Switzerland. Honestly, though, we're kind of getting two different stories out of the administration. On the one hand, we have Treasury Secretary Scott Besson signaling that it's time to move forward. In an interview with Fox News on Tuesday, he said, we have shared interests. This isn't sustainable, especially on the

Chinese side. 145% tariffs are the equivalent of an embargo. We don't want to decouple. What we want is free trade. On the other hand, though, we have President Trump continuing to throw barbs at the Chinese as the trade talks approach. On Wednesday, he bluntly told the press that he wouldn't be reducing tariffs ahead of talks. Beijing had actually called for tariffs to be removed before coming to the table, so this could have been a powerful good faith gesture to allow Chinese officials to save face, but alas, not happening. Trump also remains fixated on the idea that trade deficits are a deadweight loss, stating,

we were losing a trillion dollars a year. Now we're not losing anything, you know? That's the way I look at it. We were losing with China on trade a trillion dollars a year. What's more, in a radio interview on Wednesday, he said, I think talking about Jimmy Lai is a very good idea. We'll put it down as part of the negotiation. Lai is a former media mogul facing life in prison in Hong Kong under strict national security laws,

so these statements would obviously antagonize Beijing. In short, the president is positioning himself as a belligerent, heading into the negotiations and doesn't seem at all inclined to make any concessions. Beijing seems to paying attention to the continued narrative. In a press statement issued last night, the Chinese embassy pointedly noted that negotiations were being held at the requisition of the U.S. They added, if the U.S. genuinely wants a negotiated solution, it should stop making threats and exerting pressure and engage in talks with China on the basis of equality, mutual respect, and mutual benefit. China will not seek any agreement at the cost of principles of international fairness and justice.

Importantly, Trump himself is not traveling to Switzerland this weekend to take part in the talks. So maybe we see another situation where Besson steps in as the voice of reason. During the initial tariff shock, it was reported that Besson essentially strong-armed the president into the 90-day pause while trade advisor Peter Navarro was out of the room. And in case you were wondering, Navarro is also not joining the trip to Switzerland later this week. In the media, Besson is flagging that this will probably only be the start of a long process, stating, my sense is that this will be about de-escalation, not about the big trade deal. well, we've got to de-escalate before we can move forward. At the same time, he is not buckling

on the agenda of the administration. In an official statement, announcing the meetings, he wrote, Economic Security is national security, and President Trump is leading the way both at home and abroad for a stronger, more prosperous America. I look forward to productive talks as we work towards rebalancing the international economic system, towards better serving the interests of the United States. And this underscores a key point that is worth keeping in mind as these trade negotiations ramp up. The administration has been very clear all along that this is an intentional strategy to rebalance the global economy. The tariff rollout has, yes, to most observers, been seen as chaotic, but the end goal of reshaping global trade was not an impulsive decision from Trump. It was an

intentionally crafted policy that both Besson and lead economic advisor Stephen Moran have discussed at length. And so in that frame, I think it's probably worth tempering expectations of what a trade deal with China would actually mean. Reversion to the state of play in 2024 seems to be completely off the table. It would be very surprising to me if even after a deal, the tariffs on China would remain at anything other than a level that still meaningfully changes the way that global trade operates. The administration does not seem to me to be trying to negotiate trade concessions as we saw during the first Trump presidency. They're trying to negotiate a new financial order. Every bit as paradigm shifting as the Nixon shock, Paris Accords, or perhaps if they have their druthers,

even the original Bretton Woods Agreement. The reason this matters is that markets are trying vane gloriously, I would say, to price in the resolution of the trade war. A lot of analysis is going into whether the U.S. or China have the most leverage in trying to pick up on any signs of weakness. I think this completely misses the broader point. Even if a trade deal is signed over the coming months, it will not be about returning to normal. It will be about coming to terms on what the new paradigm looks like. Digging a little deeper into what that new global economic order would look like, Besson himself had some interesting comments during an oversight hearing in Congress yesterday. He noted that he's working on laws that will restrict U.S. investment into China with two members of

Congress stating, we talked about the importance of establishing either a red light or green light and not having a yellow zone for outbound investment. The Outbound Investment Security Program is an important national security tool in our effort to restrict China from exploiting the benefits of U.S. investment. This new restriction would line up with a view that Michael Howell of cross-border capital has been sharing recently that the conflict with China should not be viewed as just a trade war, but rather a more in-depth capital war. Hostilities flared between Besson and Democrats, with ranking member Maxine Waters accusing the Treasury Secretary of, quote, asslighting the American people into believing that this chaos is all part of some master plan.

While Democrats excoriated Besson on the economic weakness of the first hundred days of the administration, from Besson and the Trump administration's point of view, this is all part of the plan, as unclear as that plan is to the outside world. Still, I think that this idea that this is a capital war, not a trade war, is really relevant and something to keep an eye on, especially as these new trade deals start to come in. For now that that is going to do it for today's breakdown. Appreciate you listening, as always. And until next time, be safe and take care. of each other. Peace.