Fed warns of higher prices
Federal Reserve chairman Jerome Powell said the US economy was likely to face a period of higher prices and weaker growth than seemed possible a few weeks ago because of larger-than-anticipated tariff hikes announced by President Trump.
“It is now becoming clear that the tariff increases will be significantly larger than expected, and the economic fallout of higher prices and slower growth is also likely to be larger than expected,” Powell said in Friday remarks to a conference in Virginia.
Officials will still need to take some time to assess how the Trump administration’s tariff policies will play out and how the central bank should respond, Powell said.
US-listed Chinese stocks like Alibaba and Baidu also slumped. The SPDR S&P Bank ETF dropped 4%, with Morgan Stanley leading the declines.
China retaliates
The rout came as China imposed a 34% tariff on all American imports starting April 10, in addition to targeted actions against poultry producers and weapons makers, according to the official Xinhua News Agency.
The latest salvo in Donald Trump’s trade war added to volatility that has been gripping global financial markets since the President announced the harshest tariffs in a century. Trump, for his part, appears to be sticking to his guns, saying his economic policies “will never change”.
The Cboe Volatility Index soared near 40 – levels associated with some of the worst market turbulence in recent memory. Treasuries continued to soar as investors sought safety, while a measure of credit risk spiked to the highest level since the regional banking crisis in March 2023.
US job growth beat forecasts in March and the unemployment rate edged up, pointing to a healthy labour market before the economy gets hit by widespread tariffs. This was the first major piece of data for the quarter – which could have wide-ranging implications for bond, stock and currency markets as well as the Fed’s next moves. Powell is scheduled to deliver remarks at 11.25am in Arlington, Virginia, which will be parsed for signs of weakness spreading to the workforce.
“A good jobs report won’t be enough to quell recession fears because it’s backward-looking and won’t full give insight into how hard the economy will take a hit from the trade war,” said Scott Ladner, chief investment officer at Horizon Investments.
Now, traders are boosting their expectations for the Federal Reserve to cut interest rates this year. Money markets are fully pricing four quarter-point reductions by year-end, with a more than 50% chance of a fifth – up from just three cuts priced in before the levies were announced. That pushed US 10-year yields below 3.90%, the lowest since before election day, while oil tumbled to the lowest in four years.
The S&P 500 is down 14% from its February record and on track for a sixth week of losses in the past seven. Fund managers yanked US$4.7 billion out of US stocks in the week through April 2 in the second week of outflows, data compiled by EPFR Global and Bank of America show.
“The market is bleeding and more pain is clearly coming as this escalating trade war risks pushing the US economy into a recession,” Luca Paolini, chief strategist at Pictet Asset Management said over the phone. “It’s not a surprise China would retaliate. But this will inevitably cause a recession because the damage is done – unless Trump backs off.”
Friday’s losses follow a massive wipeout by US stocks on Thursday that erased US$2.5t in value in the wake of President Donald Trump’s drastic new trade tariffs, which ignited widespread recession fears.
The trade fight weighed hard on shares of industrials and materials companies on Friday, including tool company Stanley Black & Decker Inc, which fell 2%, while machinery builder Caterpillar Inc dropped 5.6%. Motorcycle manufacturer Harley-Davidson Inc and appliance maker Whirlpool Corp also declined. The Philadelphia Semiconductor Index that houses Micron Technology and Advanced Micro Devices sank 3.6%.
Trump on Wednesday imposed the steepest American tariffs in a century, saying he will apply a 10% tariff on all exports to the US, with even higher duties on some 60 nations, to counter large trade imbalances with the US.
“How bad will it get for the economy? With so much uncertainty swirling, stocks are selling off and that’s signalling that investors see both economic and profit growth slowing because of the trade war,” said Adam Sarhan, founder of 50 Park Investments.
With reporting by Herald staff.
