By Paul La Monica

If the U.S. economy were a car, President Donald Trump would be driving with Treasury Secretary Scott Bessent in the passenger seat helping to navigate. Federal Reserve chair Jerome Powell? He'd be in the back seat keeping conspicuously quiet, worried that Trump will begin yelling about how he'll pull over and let Powell out if he starts talking about inflation again.

Powell, though, may have no choice. Core PCE price inflation, the Fed's favored measure that was released on Friday, came in hotter than expected even though the impact of tariffs isn't in the numbers yet. The University Of Michigan Consumer Sentiment survey, meanwhile, showed inflation expectations rising as well. The S&P 500 was down 1.3% following the reports.

The stock market drop also meant the major indexes would finish the week lower. The S&P 500 has fallen 0.9%, while the Dow Jones Industrial Average had declined 0.3%, and the Nasdaq Composite had dropped 1.7%

The Fed, though, may not be riding this one out. Remember, the central bank has two mandates, promoting price stability and maximum employment. And while core inflation remains sticky, an economic slowdown might be a bigger concern. The last few jobs reports have shown weaker job growth. While Powell was quick to note all the "uncertainty" about the economy due to Trump tariffs at his most recent press conference on March 19, that could change when March's payrolls are released on April 4.

"Tariffs could have a transitory impact on inflation and be manageable for the Fed," says Dec Mullarkey, managing director of investment strategy and asset allocation for SLC Management. "But if there is weakness in the job market the Fed will jump on it."

Lower rates would ultimately put Powell and the administration on the same page. Bessent has said in numerous interviews that he and Trump are more focused on the 10-year than the short-term lending rates the Fed controls. The 10-year Treasury yield is currently hovering a little below 4.3%, down from a 2025 peak of just under 4.8% from mid-January, and those rates have fallen even though the Fed hit the pause button on rate cuts at its January and March meetings. Rate cuts could help keep them there, says Campe Goodman, fixed-income portfolio manager at Wellington Management, who notes that while the Fed is supposed to be apolitical, that doesn't mean it is immune from political pressure. "If the question is to cut or not cut, then why not cut?" he says.

Lower rates would also help stimulate the economy, which seems to be slowing fast. It's also worth noting that the Fed cut rates three times late last year by a combined percentage point, and rate cuts typically take time to work their way into the broader economy, so their impact may just start to kick in later this year. That could help reignite the stock market too.

The market will still have to deal with tariffs, the most likely source of recent volatility. Lingering worries that the Fed may be on the sidelines for longer haven't helped, though. If Powell decides to take the wheel and steer towards lower rates, there's still time to dodge the bear in the road.

Email: paul.lamonica@barrons.com

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March 28, 2025 15:45 ET (19:45 GMT)

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