Powell at a Crossroads

May 4-10, 2025

Big news. The Federal Reserve’s Open Market Committee meeting left the key interest rate unchanged:

Details in the final section of the Review, here we note that there were two fundamental options for action: either to lower the rate (Trump’s logic), or to raise it (taking into account the clearly increasing inflationary trends, see the previous review). In fact, the Fed has avoided a final decision on the issue. At the same time, within the framework of the demonstrated logic of actions, it is impossible to achieve any result, neither attracting investment in the real sector, as Trump wants, nor fighting inflation, as Powell wants.

Macroeconomics. Industrial production in Germany -0.2% per year, 22-nd minus in a row:

In Italy -1.8% per year, 26th minus in a row:

Mexico’s PMI (44.8), an industry benchmark that measures the state of the industry; a reading below 50 indicates stagnation and decline, is at a record low, excluding Covid:

The UK services PMI (49.0) is at its lowest since January 2023; before that, only Covid and Brexit had caused such numbers:

US Services PMI Input Price Component (65.1) at more than 2-year high:

An additional factor requiring an increase in the discount rate.

The US trade deficit (-$140.5 billion) has updated its record high:

Mexican consumers are most pessimistic in 2 years:

The share of Americans unsuccessfully looking for work for more than six months has reached 23.5%, the highest since the fall of 2017 (not counting Covid):

And this is an argument in favor of Trump, the rate needs to be lowered to stimulate the economy.

Unemployment in New Zealand is almost back to the peak of Covid; it was previously at this level in 2016:

Canada has also seen a peak since 2016, not counting the Covid surge:

Retail sales in Italy -2.8% per year; not counting Covid, this is the worst dynamics in 6 years:

The Bank of China has cut the reserve ratio for large banks by 0.5% to 7.5%. And at the same time, the rate on 7-day reverse repo transactions by 0.1% to 1.4%; in addition, it intends to conduct a series of liquidity injections for various reasons. You can read more here: https://www.profinance.ru/news/2025/05/07/cfxn-kitaj-obyavlyaet-o-masshtabnykh-merakh-po-smyagcheniyu-politiki-v-popytke-podder.html

Such actions indicate that the Chinese economy is in trouble and the leadership wants to stimulate the economy given the tariff wars with the United States. Note that our suspicion that the good data of previous weeks was, so to speak, somewhat embellished, was confirmed.

The Bank of England cut the interest rate by 0.25% to 4.25%, the opinions of the board members were divided. As did the Central Bank of Sweden and the Central Bank of Norway.

The Central Bank of Brazil raised the rate by 0.50% to 14.75%, a 19-year high.

The colossal growth of Bitcoin, which rushed to the winter peaks:

And also a rally in stock markets (the German one has already managed to update its record peak:

They raise suspicions that the monetary authorities of various countries, primarily the Federal Reserve and the ECB, have secretly printed something.

Main conclusions: Fed Rate Decision Letter:

▪️Economic activity continues to expand at a solid pace.

▪️Unemployment has stabilized at a low level in recent months, and labor market conditions remain stable.

▪️Inflation remains slightly elevated.

▪️Uncertainty about the economic outlook has increased further.

▪️Risks of higher unemployment and higher inflation have increased.

▪️The Fed will continue to reduce the QT balance sheet – $5b per month.

▪️The Fed is mindful of the risks to both sides of the dual mandate inflation labor market.

▪️The Fed is prepared to change monetary policy if US macro data warrants it.

It should be noted that both this letter and Powell’s subsequent press conference actually included some political pressure on Trump. It was said that the Fed would not succumb to pressure from the White House, and even some falsification of data. As we can see from the Fund’s previous reviews, the assertion about the growth of economic activity (according to official data, GDP fell in the first quarter) is quite controversial, as is the stability in the labor market (data on the number of unemployed people who have been unable to find work for a long time in the second section of the Review).

In fact, we can say that the structural nature of the crisis has led to the fact that, according to some data, the rate needs to be raised, while according to others, it needs to be lowered. Powell made a compromise (within the framework of his understanding of compromise) decision, but it does not allow either stimulating the economy or stopping the incipient inflation processes. Whether there is a good solution in this situation is a big question, but Powell should have outlined this topic in the current situation. But he avoided answering.

At the same time, the situation in the real sector of the economy around the world is deteriorating. The promotion of financial markets in such a situation looks extremely suspicious, since, after all, the real sector is at the base of the pyramid of financial assets. And its reduction against the backdrop of a boom in speculative markets may mean the threshold of a collapse, which is what we warned our readers about last week.

We congratulate all our readers on the recent Victory Day and wish them a successful exit from the long May holidays!