The market wants a hero to save it from tariff uncertainty. Federal Reserve Chair Jerome Powell is not ready to wear a cape yet.

It's not that Powell is shy when it comes to challenging President Donald Trump's flagship policy. He warned of higher prices and higher unemployment due to tariffs when speaking at the Economic Club of Chicago on Wednesday.

But Powell suggested the Fed's focus would be making sure a one-time boost to prices from tariffs doesn't send inflation into an upward spiral.

Stocks sank and gold prices climbed to fresh highs following the remarks, suggesting markets took the hint that rate cuts aren't coming soon. That seemed to be Trump's reading -- in a post on social media early Thursday the president accused Powell of acting too slowly and said his "termination cannot come fast enough."

However, traders of short-term interest-rate futures are still betting the Fed will resume reducing rates in June and deliver four cuts by the end of the year.

They can't both be right. Analysts at Fitch Ratings reckon the Fed will wait until the fourth quarter before cutting rates. By that time they see a reduction as unavoidable as annual U.S. growth will be slowing to just a 0.4% pace.

A more worrying conclusion is that traders think the first economic data that include the full effect of tariffs -- which should come around June -- will be so bad that they will force the Fed's hand. The World Trade Organization on Wednesday said it expects the global trade in goods to fall by 0.2% this year as a result of tariffs, having previously forecast growth of 2.7%.

The risk is that by the time Powell is willing to step up to save the day, the damage is already done.

-- Adam Clark

The Barron's Daily is taking a break from publishing on Friday and will return Monday.

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Fed's Powell Warns of Challenging Scenario With Tariff Disruption

President Donald Trump's tariff policy will likely lead to higher inflation and slower growth, Federal Reserve Chair Jerome Powell said at an event Wednesday, pointing to the toxic economic combination known as stagflation.

   -- Powell told the Economic Club of Chicago that the level of tariff 
      increases announced so far was significantly larger than anticipated and 
      that the same is likely to be true of the economic effects. Fed officials 
      could find themselves in a "challenging scenario" balancing maximum 
      employment and stable prices. 
 
   -- It was Powell's second public appearance since the White House unveiled 
      sweeping tariffs on U.S. imports on April 2. Policy has fluctuated, with 
      the heaviest tariffs suspended for 90 days amid a flurry of bilateral 
      trade negotiations, but the administration has promised more to come 
      targeting specific industries and sectors. 
 
   -- Investors are more worried about Trump's trade policies than any other 
      issue, according to a Bank of America survey of global fund managers on 
      Wednesday. But Fed officials signaled they are inclined to hold steady on 
      interest rates amid the uncertainty. Futures traders see a 14.2% 
      probability of a rate cut in May. 
 
   -- Powell is closely watching a Supreme Court case that could threaten the 
      Fed's independence by challenging a 1930s precedent that prevents 
      presidents from firing some federal officials for political reasons. 
      Trump has already challenged Fed independence by calling on it to lower 
      rates more than once in recent weeks. 

What's Next: Trump's tariff policy will likely wipe away any progress the Fed has made toward reducing inflation and keeping employment stable, Powell said. Unemployment is likely to rise as the economy slows and the effects of tariffs become clearer. But the Fed will likely move away from achieving its goals this year.

-- Nicole Goodkind

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Big U.S. Tech's Risks in China Go Far Beyond Nvidia

Nvidia and Advanced Micro Devices have cast attention on a bigger problem facing the U.S. tech industry in light of the Trump administration's trade war with China. Companies in chip manufacturing and beyond are at risk as Beijing and Washington square off and as China seeks greater tech independence.

   -- China's government has already begun the transition to greater 
      independence with restrictions on Chinese local and central government 
      purchases of new PCs and servers, starting a year ago. Shifting the 
      country's installed base of software, PCs, and servers will take time and 
      require transforming the Chinese supply chain. 
 
   -- China approved 18 central processing unit chips for government purchase, 
      and none of them are from Intel or AMD, the two dominant players 
      worldwide. Many of the CPU chips have intellectual property from UK-based 
      Arm, which long term faces the same risk in China as other non-Chinese 
      chip companies. 
 
   -- Microsoft's Windows operating system and Oracle's database software also 
      face roadblocks. Along with U.S. CPU chips, new PCs and servers purchased 
      by the Chinese government won't run Windows, but rather a choice of six 
      homegrown options. China also has 11 domestic options for databases. 
 
   -- American companies that make chips domestically such as Texas Instruments 
      and Intel see threats. While China has some exceptions to its 125% 
      retaliatory tariff on U.S. goods, U.S.-produced chips aren't included. 
      Chips made in Taiwan for Apple, Nvidia, Qualcomm, and AMD won't face 
      China's tariff. 

What's Next: Smartphone and PC imports into the U.S. don't face Trump tariffs for now but levies on imported chips and technology containing them are coming. Apple faces the most China risk. Though it has assembly in Vietnam and India, Apple puts together a large majority of its devices in China.

-- Adam Levine

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TSMC Profit Surge Sets Scene for Chip Makers' Earnings

Taiwan Semiconductor Manufacturing is one of the first chip-related stocks to report numbers at the start of earnings season. Its surge in profit came a day after Dutch chip-making equipment company ASML gave an underwhelming forecast for its sales. The semiconductor sector has been on a wild ride the past few weeks amid U.S. tariffs on trading partners across the globe.

   -- The Taiwanese chip manufacturer, known as TSMC, reported early Thursday 
      that its first-quarter profit jumped 60% to about $11.12 billion, topping 
      expectations. 
 
   -- The key artificial intelligence player and Nvidia supplier said it hasn't 
      suffered any hit from tariffs so far even as President Donald Trump has 
      said the company could face an import tax of up to 100% if it doesn't 
      shift production to the U.S. 
 
   -- "While we have not seen any changes in our customers' behavior so far, 
      uncertainties and risks from the potential impact from tariff policies 
      exist," said CFO Wendell Huang, noting "strong demand" for its products 
      in the current quarter. 
 
   -- Last week, Trump temporarily exempted tech devices from the so-called 
      reciprocal tariffs. Investor relief was short-lived, though, after the 
      U.S. imposed licensing requirements on some AI semiconductor exports to 
      China this week, including from Nvidia, AMD, and Intel. 

What's Next: The U.S. president has repeatedly said he may impose tariffs on semiconductors produced abroad, and it isn't clear if TSMC would receive a waiver on such levies despite pledging $165 billion in U.S. investment -- or how that may affect the global chip supply chain.

-- Adam Clark, Angela Palumbo and Elsa Ohlen

***

Foreign Central Banks Load Up on T-bills, Sell U.S. Bonds

Foreign central banks and government agencies continue to go all in on short-term U.S. Treasury bills while dumping longer term U.S. debt, the latest Treasury International Capital report said. At the same time, private investors increased their holdings, helping to push up total foreign ownership of Treasuries in February.

   -- For four straight months through February, foreign institutions sold 
      Treasury bonds and notes, or debt that matures in over a year. At the 
      same time, they have been consistently buying shorter-dated bills that 
      are virtually risk-free and repay in less than a year. 
 
   -- Taken together, they signal that foreign governments could be pessimistic 
      about the U.S.'s long-term prospects, while trying to increase their 
      near-term access to cash. Investors worry that some foreigners could be 
      selling U.S. assets in retaliation for President Donald Trump's trade 
      policies. 
 
   -- Foreign central banks unloaded a net $19.6 billion in longer term U.S. 
      bonds and notes in February, after selling $24.1 billion in January and 
      $42.3 billion in December, the Treasury International Capital report 
      said. They sold just over a billion in November. 
 
   -- At the same time, banks and governments bought a net $61.6 billion of 
      Treasury bills, or shorter-term debt, in February. That's after buying 
      $67 billion in January and $2.3 billion in December. The heavy appetite 
      suggests that central bankers favor the yields on shorter-dated bills. 

What's Next: Foreigners, including private investors and official sectors, hold $8.8 trillion of U.S. debt, Treasury figures show. Japan bought a net $31.7 billion of longer-dated Treasury debt in February, while China sold a net $4.8 billion. The next Treasury International Capital report comes out on May 16.

-- Karishma Vanjani and Janet H. Cho

***

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