What the Fed, earnings and trade talks are telling us about the markets and economy.
It was a week of white smoke and a new pope, a Federal Reserve meeting and preliminary trade deals. Earnings reports also continued to pour in at a fast and furious pace—they showed strong double-digit growth with a healthy dose of future skepticism. As a result, the financial markets continued to chop without direction.
This weekend, Treasury Secretary Scott Bessent and U.S. Trade Representative Jamieson Greer jet to Switzerland to meet with their Chinese counterparts to open tariff negotiations. The stakes are high, as President Trump has left his 145% tariff on China unchanged, despite issuing a 90-day pause on higher rates for most other countries in April.
The tone isn’t exactly warm and fuzzy as trade negotiations approach. China warned the U.S. not to use the talks “as a smokescreen to continue coercion and extortion,” and to “show sincerity” about negotiations by pausing tariffs between the two countries for now. That request was denied, and as usual, the administration offered conflicting signals of where talks stand. At one point this week, Bessent promised deals; at another, President Trump declared no deals were necessary; then on Friday, he posted on Truth Social that an 80% tariff on China “seems right,” and that it’s up to Bessent to negotiate.
But there was apparently some progress elsewhere, as Trump announced a limited bilateral trade agreement with the U.K. The deal leaves in place his 10% tariffs on British exports, modestly expands agricultural access for both countries and lowers prohibitive U.S. duties on British car exports. Stocks rose on the news, and “risk-on” sentiment reappeared in the cryptocurrency market and Magnificent Seven stocks. However, with roughly 60 days left before Trump’s 90-day tariff extension ends and dozens of negotiations remaining, the “liberation day” scenario hasn’t vanished. Uncertainty is far from over, even if the financial markets have stabilized from their worst moments in the immediate aftermath of the tariff announcement.
As widely expected, this week, the Federal Reserve Open Market Committee (FOMC) held its policy rate steady. Their target for the federal funds rate remains at 4.25% to 4.50%. There was no change to the Fed’s balance sheet policy.
The Fed’s statement about the decision emphasized that the risks to inflation and the economy have increased since its last meeting because of uncertain tariff policy. Despite recent solid economic growth, the FOMC said it “judges that risks of higher unemployment and higher inflation have risen.” This is an acknowledgement that the current economic outlook is a challenge to both sides of the Fed’s dual mandate of maintaining policy to achieve low inflation and full employment.
In his press conference, Fed Chair Jerome Powell noted the risks of higher inflation and weaker growth (stagflation) have increased, warranting a cautious approach to changing policy. However, he maintained his stance that the Fed doesn’t need to hurry to adjust rates. Trump responded on Truth Social: “‘Too Late’ Jerome Powell is a FOOL, who doesn’t have a clue. Other than that, I like him very much! Oil and Energy way down, almost all costs (groceries and ‘eggs’) down, virtually NO INFLATION, Tariff Money Pouring Into the U.S. —THE EXACT OPPOSITE OF “TOO LATE!” ENJOY!”
When asked at a Wednesday press conference if Trump’s criticism and calls for rate cuts influence the central bank, Powell said, “We’re always going to consider only the economic data, the outlook, the balance of risks. And that’s it. That’s all we’re going to consider. So, it really doesn’t affect either our job or the way we do it.”
While this battle of wills rages, we expect interest rates are likely headed lower, but the conditions to make that happen—inflation at or below the Fed’s 2% target and clarity about trade policy—haven’t been met.
In economic news, weekly jobless claims fell to 228,000 from 241,000 the prior week. But first-quarter productivity fell 0.8% after rising 1.7% in the fourth quarter. Unit labor costs soared 5.7% in the first quarter versus the consensus of 4.0%. Higher labor costs and lower productivity suggest companies aren’t getting as much work done per worker and are paying more to do it—not good for profitability.
Disney reported strong earnings, driven by a rebound in its domestic parks business and strong performance in its streaming unit. It also announced plans to build a new theme park and resort in Abu Dhabi, United Arab Emirates, marking its first major expansion into the Middle East and its seventh global resort. In a downer for Alphabet, Apple announced it is considering reworking the Safari web browser on its devices to focus on AI-powered search engines. Google has long been the default search tool of Apple’s browser, but a court case could force the two to unwind the pact.
Now that over 75% of S&P 500 companies have reported earnings, the market will return to focusing on the future over the coming weeks. Widespread reports of empty ports, dwindling inventories and “for lease” signs have investors on edge. While we may step back from the tariff ledge as trade talks proceed, recession risks remain. In the meantime, negotiations over the upcoming tax bill could be a source of anxiety and stress for people facing the potential of higher taxes. It was reported this week that Trump is seeking to raise taxes on the highest earners and to close the so-called carried interest loophole, as he seeks to find enough savings to extend his 2017 tax cuts, boost funding for immigration enforcement and defense, and raise the debt limit.
As The Shirelles once sang it so beautifully, “Mama said there’ll be days like this, there’ll be days like this, my Mama said… Don’t you worry now, Mama said.” To all the mothers, grandmothers, aunts and mother figures out there, have a wonderful Mother’s Day weekend. Thank you for all you do to hold our worries at bay and help us think hopefully about the future.
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