Weekly Insights: FOMC Fails to Alleviate Macro Concerns, Reciprocal Tariffs Could Be the Next Turning Point

Performance of Global Equity Indices(in US Dollar)

• Last week, global equity assets showed lackluster performance overall. Greater China stocks experienced a notable pullback, with the Hang Seng Tech Index—previously the strongest performer—dropping over 4%. The CSI 300, Shanghai Composite Index, and Hang Seng Index also saw significant declines. In contrast, U.S. stocks temporarily stabilized and remained volatile, ultimately closing slightly higher for the week. Year-to-date, Greater China, Europe, and other non-U.S. markets have significantly outperformed U.S. equities.

Key Market Themes

FOMC Review: Slower Balance Sheet Reduction Can’t Mask Stagflation Risks, Feigned Calm Won’t Alleviate Macro Concerns

• Last Wednesday, the Federal Reserve’s FOMC meeting proceeded as expected, with most actions aligning with market forecasts. Interest rates remained unchanged, and Powell reiterated that there is no urgency to cut rates. While the dot plot still indicates two rate cuts this year, officials have grown noticeably more cautious compared to December—over 40% of Fed officials now support either just one rate cut or none at all. 

• Correspondingly, the Fed lowered its economic growth forecast and raised its inflation expectations in the Summary of Economic Projections (SEP). This move was largely anticipated by the market and reflected recent shifts in sentiment. However, on a positive note, the long-term PCE inflation target remained unchanged at 2.0%, without any quiet upward adjustments.

• Two Unexpectedly Positive Surprises

  1. The Fed officially slowed the pace of its quantitative tightening (QT) by reducing the monthly cap on Treasury runoff from $25 billion to $5 billion. However, Powell downplayed this move in the press conference, calling it a “common-sense adjustment” rather than a signal of any policy shift.

  2. Powell Dismissed the University of Michigan Consumer Sentiment Data – In response to recent concerns, Powell directly disputed the widely discussed Michigan Consumer Survey, arguing that its correlation with economic activity is weak and that the Fed prioritizes hard economic data over survey-based indicators.

• Regarding potential policy shocks from the new administration, Powell tried to maintain a neutral stance, repeatedly emphasizing high uncertainty while also stressing that the Fed is focused on distinguishing signal from noise. However, when asked about the potential impact of tariffs, Powell reluctantly admitted that it’s difficult to quantify precisely. Some institutions interpreted this as the Fed not being concerned about tariff shocks, but we disagree.

• We believe that compared to last year, the Federal Reserve has noticeably lost some of its strategic confidence—perhaps even Powell himself has no idea what Trump will do next. Since Trump took office, Powell’s use of the word “uncertain” in public remarks has surged dramatically. Therefore, while the FOMC attempted to downplay inflation concerns, the real test will come this week. If the upcoming PCE data exceeds expectations again, the Fed will find itself in an extremely awkward position.

Retaliatory Tariffs Incoming—A Potential Turning Point for U.S. Stocks

• Beyond this Friday’s PCE data, the biggest market disruptor right now is the "Reciprocal Tariff" policy set to take effect on April 2—now less than a week away. According to Trump’s original plan, every country would have its own tariff schedule, benchmarked against the U.S. tariffs imposed on their exports, with no exceptions.

• However, in a recent interview, Treasury Secretary Bessent introduced the concept of the “Dirty 15”, stating that reciprocal tariffs would only apply to 15 countries deemed highly unfavorable to the U.S. in terms of trade, currency, and regulations. Interestingly, according to Goldman Sachs, the U.S. trade deficit in 2024 is concentrated among approximately 15 countries, with China, Europe, and Mexico leading the list. In other words, Bessent’s “Dirty 15” almost certainly includes all U.S. trade deficit countries, making it nearly indistinguishable from a universal tariff policy—after all, no one would impose higher tariffs on their surplus partners.

• Furthermore, Bessent stated that some pre-negotiated countries might be exempt from these tariffs. In response, Morgan Stanley believes that Mexico, Canada, India, and certain EU goods may have room for tariff relief through negotiations, but China, other key nations, and specific EU-designated products will likely be subjected to full tariff enforcement. Additionally, April 2 may just be the beginning—Trump’s China tariffs could escalate to 60% within the next two years.

• Over the past two weeks, Trump has been relatively quiet, and markets have remained relatively calm. However, this does not signal the end of tariff threats. For the upcoming reciprocal tariff policy next week, we expect the Trump administration to first introduce a “one country, one tariff rate” policy targeting the 15 trade deficit nations, followed by an implementation strategy based on threats and delays—essentially a scaled-up version of last month’s U.S.-China-Canada-Mexico trade maneuver.

• Our stance remains unchanged—under the broader debt reduction agenda, do not underestimate Trump’s commitment to tariffs. Even though markets have found some short-term stability, inflation, tariffs, and corporate earnings remain highly uncertain. For U.S. equities, we remain focused on risk management, maintaining less than 10% portfolio exposure at this time.