Financial markets have survived a series of rapid-fire miniature crises lately. What’s remarkable is that the Federal Reserve hasn’t yet needed to get involved in any of them.
Enjoy the calm while it lasts.
I think it’s a good bet that what we are seeing is a rare moment of peace for the Fed, an illusion of tranquillity that isn’t likely to last amid the disruptions, dislocations and presidential bluster testing the markets and the economy.
After several years of dominating the markets by sharply raising interest rates to combat inflation — and then gradually reducing them as the rate of price increases ebbed — the Fed did essentially nothing at its latest meeting, just as nearly everybody expected.
Consider that the stock, commodity and bond markets have wobbled lately over a range of profound issues including the appropriate value and cost of artificial intelligence, President Trump’s tariff threats and the beginning of mass deportations. But so far at least, the markets haven’t swerved too much, major financial damage has been contained, inflation and the labor market have stayed stable, and the Fed has been able to sit on the sidelines.
The Fed right now is like a powerful player on a major sports team being held comfortably in reserve. But rest assured, its time is coming.
Eerily Quiet
On Wednesday, the Fed said that aside from the inflation and labor market data it always scrutinizes, it was also studying the rapid stream of policy pronouncements coming out of the Trump administration.
As the Fed chairman, Jerome H. Powell, said in a news conference on Wednesday, “We are waiting to see what policies are enacted. We don’t know what will happen with tariffs, with immigration, with fiscal policy or with regulatory policy.” For now, he said, like many Americans, the Fed “is just on hold waiting to see what comes down.”
In a note to clients, Mark Zandi, chief economist of Moody’s Analytics, wrote that the Fed needs to assess Trump policies on tariffs, deportations and “tax cuts that will be at least in part deficit financed.”
“These policies are inflationary, although to what degree depends on how aggressively the new administration pursues them,” he said. “Until there is more clarity on these policies and their fallout, the Fed will keep monetary policy on hold. “
The Fed faces plenty of pressing issues, not least of which is the threat to its own independence posed by Mr. Trump, who says he knows more about interest rates than the Fed.
But it’s fair to say that the consensus in the markets is that without the Fed at the helm, the stability of U.S. monetary policy would be far less assured.
The Markets
The Fed’s mandate is to keep the rate of inflation low while enabling the overall economy and the labor market to be as strong as possible. It has no day-to-day role in the stock market. Yet it has shored up that market repeatedly over the last few decades when stocks have fallen enough to affect the broader economy.
In addition, it has played a gargantuan role in the bond market since the financial crisis of 2007-8, not only by moving short-term interest rates but by buying vast quantities of bonds, including mortgage-backed securities, and now allowing its holdings to diminish somewhat — from almost $9 trillion to a still prodigious $6.8 trillion. Its bond market heft combined with its interest rate policies and other programs give it enormous sway in the mortgage, housing and foreign exchange markets, and it has helped stabilize the financial systems of other countries around the world, too.
Recently, financial markets have been relatively sedate. Wall Street is overwhelmingly bullish, in no small part because the Trump administration is filled with billionaires who are devoted to generating profits. And corporate earnings reports lately have been strong. The stock market may well rise over the course of the next year. Yet, in many ways, stocks are on shaky ground.
That was evident early this week, amid indications that the pricey, resource-intensive U.S. approach to artificial intelligence, which has fueled the stock market, may need some rethinking.
Stocks in the United States swooned when the excellent performance of a new, relatively cheap Chinese artificial intelligence engine, DeepSeek, raised questions about the strategies of deep-pocketed American companies like Google, Microsoft, Meta and Open AI.
They have poured billions into advanced A.I. hardware and power supplies, money that has swelled the coffers of the giant chipmakers Nvidia and Broadcom as well as utilities and energy companies with nuclear power and fossil fuels. The brute force approach to developing advanced artificial intelligence may not make sense if Chinese open-source A.I. can achieve similar results at a small fraction of the cost.
The stock market’s been coping with the A.I. shock, but the problem of assessing and, possibly, revaluing the already expensive stocks of major companies won’t go away.
Many of the biggest and most successful tech companies, including Nvidia, Palantir and Meta, are already wildly overvalued, based on traditional metrics like their price-to-sales and price-to-earnings ratios. If their profits flagged, or traders’ enthusiasm for A.I. ebbed, the stock market could deflate quickly.
That said, DeepSeek’s cheap, efficient performance could be good news for the economy as a whole. More widely available A.I. could be a boon for overall productivity, as Olivier Blanchard, the former research director of the International Monetary Fund, posited in a short social media post. And rising productivity is the ultimate source of sustainable wage gains and profits in the economy.
The Fed is not directly involved in these issues now and we’ll all be better off it doesn’t need to be. But if markets eventually shudder sufficiently to threaten acute “financial stability,” Mr. Powell suggested, the Fed might need to intervene.
Tariffs, Immigration and Uncertainty
The administration’s actual policies on tariffs, immigration and deportation are hard to pin down. But there was a brief demonstration of the potential market risks from those still-nascent policies early in the week.
Until Colombia agreed to accept U.S. military planes carrying deported immigrants on Sunday, Mr. Trump put a tariff in place that would have made the already steep price of coffee, a major Colombian export, soar even higher.
That conflict has been damped down but it grabbed the attention of serious coffee drinkers — like me — and it hinted at possible trouble ahead. There could be widespread market effects if the Trump administration presses ahead with its determination to impose tariffs on any nation bold enough to thwart the president’s policies.
Most economists say tariffs are a bad idea. They are inflationary, tending to slow economic growth and hurt domestic consumers. How far the Trump administration is willing to go will determine the net economic impact of new tariffs, but the damage could be severe if countries around the globe are drawn into a tit-for-tat trade war.
Similarly, most studies have shown that immigration has a positive effect on the economy overall. Controlling U.S. borders and apprehending and deporting criminals are bipartisan goals. But slowing down the growth of the U.S. population by reducing immigration — and, perhaps eventually, deporting large numbers of people — would slow economic growth. How much depends on the details.
Other proposed Trump policies, like deregulation and tax cutting, could stimulate economic growth and stock market action, if done moderately and carefully. But moderation has not been a hallmark of the administration’s first days in office.
Mr. Trump is an agent of change and has vastly increased uncertainty about a range of other economically significant issues, like the size, scope and diversity of the federal work force; funding for nonprofits and schools; U.S. greenhouse gas emissions and the country’s commitment to curbing climate change; the ability of critical institutions to function effectively, including the Centers for Disease Control and Prevention, the Food and Drug Administration and the Consumer Financial Protection Bureau.
The Federal Reserve itself has come under pressure. Mr. Trump has in the past called for lower interest rates — he criticized the Fed’s performance on rates and inflation on Wednesday, after its meeting — and says he would do a better job than the Fed. Central bank independence is overwhelmingly accepted among economists as a prerequisite for sound conduct of monetary policy, but that’s yet another economic principle that Mr. Trump has challenged.
Mr. Powell was circumspect on Wednesday and said the Fed would study the economic data and be ready to intervene when and if it’s needed.
When that will be, I’m not certain. But there’s no doubt that the Fed will be needed. The markets and the economy will falter, at some point, as they do in every cycle. For decades, the Fed has jumped in periodically and limited the extent of the damage. It will need to be ready to do that inestimably important job the next time, too.
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