Morning from Copenhagen

Powell has now introduced a new “game of chicken” by openly acknowledging a conflict between the Fed’s dual mandate on unemployment and inflation in his speech in Chicago yesterday—prompted by the recent tariffs.

He admitted that the impact (and size) of tariffs has been far worse than what the Fed had previously feared, but also explicitly stated that the Fed must ensure that tariffs only cause a one-off spike in prices. A clear way to achieve that would be to allow markets—particularly traded inflation components like energy, inputs, and food—to crater – just as he did yesterday.

On the flip side, Powell also took steps toward recognizing that the growth and unemployment side of the mandate is now substantially challenged. He even went as far as quoting Ferris Bueller—”Life moves pretty fast”—which could be a subtle hint that the Fed may be forced to act soon, even if Powell personally dislikes doing so.

With many trade-related statistics suddenly freezing up in April—TEU bookings are reportedly down 30–50% across the board in the first couple of weeks—we could get much more clarity on this game of chicken once the full data roll for April comes in. This is especially relevant given how underwhelming the inflation scare has been so far, due in large part to the range of price-dovish side effects we’ve outlined in recent weeks.

That said, this was not an echo of Chris Waller’s recent tone, and markets have therefore rightfully priced in a relatively slow Fed response to what is also an immense shock to the demand side (on top of the supply shock).

Chart 1: The economy is as weak as in September 2024 (before April data coming in)