Powell’s Last Dance: Navigating the Post-Tariff Economy

• In his final year as Fed Chair, Jay Powell faces challenges and important decisions

• President Trump’s dealmaking and key policies taking shape may keep the Fed on hold

• Investors must adapt to a fast-changing macro landscape

Jerome Powell has gone through a lot as Chair of the Federal Reserve. Love him or hate him, his last dance is sure to be filled with uncertainty surrounding monetary policy, ebbs and flows in the US economy, and Truth Social bombs directed toward him by President Trump. Powell’s tenure as Fed chief ends on May 15, 2026. This is his final hoorah (maybe mercifully so, in his mind). The former investment banker and lawyer was appointed by Trump in 2018, following Janet Yellen. 

The Georgetown grad and DC native may not have much influence, at least when it comes to changing the Federal Funds target rate. As it stands, the bond market prices in less than two quarter-point cuts this year, with only three full eases expected now through when Powell is set to relinquish his role as head of the Federal Open Market Committee (FOMC). His term as a member of the Fed’s Board of Governors ends on January 31, 2028.

Few Cuts Expected Through May 2026

Source: CME FedWatch Tool

While Michael Jordan’s 1990s Chicago Bulls’ last dance was a triumph, Jay Powell's final year may involve significant public scrutiny and commentary.  It’s nothing new—he may even enjoy having the power to act independently from zone defense from the left and full-court-press opposition from the right. The 16th Federal Reserve chair must also be on guard for volatility in the macroeconomy. A black-swan event was born from the White House Rose Garden on April 2, but green shoots of economic strength may be taking shape as tariff fears linger.

At Allio, we believe Powell has done a decent job balancing risks over the past seven years. He inherited a bloated Fed balance sheet from Yellen, had to keep peace with Trump (not an easy task), was dealt a historic challenge via COVID-19, and was partly the cause of a 40-year high in inflation two years thereafter. The 72-year-old lived through the stagflationary period in the 1970s, and he surely wanted to avoid that, but some historical analyses may suggest the Fed's policies during this period were contributing factors to the surge in the Consumer Price Index (CPI) that began shortly after President Biden took office, though such interpretations are subject to ongoing economic debate. 

CPI Rate Peaked at 9.0% in June 2022

Source: St. Louis Federal Reserve

Perhaps his most infamous moment was his “pain” speech from Jackson Hole, Wyoming, in August of 2022, in which he warned companies and families that the US economy would have to go through a tough period in order to whip inflation. It turned out the pain—at least from an unemployment-level perspective—was not all that sharp. More recently, he has dribbled at the top of the key, gaming out a growing economy with lingering inflation worries. While MJ’s had one mission—win a sixth NBA title in 1998—all Powell wants to do is not drop the ball in 2025-26.

Allio’s portfolio management team sees the potential for green shoots to come sooner rather than later. Much-anticipated rate cuts have been pushed out, and a new wave of fiscal policies is on the docket, including tax cuts and deregulation. And following President Trump’s historic Middle East tour in May, geopolitical changes are happening fast, creating new world orders and alliances. 

All the while, we continue to assert that investors must watch what consumers do, not what they say. Powell’s shot clock is ticking down, and it’s a fast break to the finish. Let’s assess the playing field in this post-tariff world.

A US-China Tariff Truce Boosts Stocks

Source: New York Times

Rate Cuts Deferred Don’t Have to Make the Economy Sick

Trump may be correct in calling for immediate easing in Fed policy. The Effective Fed Funds Rate stands at 4.33%, about two percentage points above long-term inflation expectations—quite restrictive. Real-time gauges of consumer prices, which adjusted for badly lagging housing and shelter costs, peg inflation below 2%. At the same time, Treasury yields along the belly of the curve (five to 10 years) have increased since the lows post-Liberation Day. 

That puts Powell and the Fed in a tricky spot—if they were to restart their rate-cutting cycle, then there’s the chance that the yield curve could steepen (short-term rates drop as longer-term yields increase). Higher borrowing costs on, say, the 10-year note and 30-year bond would send the so-called bond vigilantes up in arms. You see, markets are already on edge, eyeing the 30-year Treasury bond’s yield seemingly tick by tick—if it were to hold above 5%, then the interest cost on the national debt would be a meaningful fiscal burden.

Ray Dalio's principles call out the importance of understanding the long-term debt cycle and the interplay between monetary and fiscal policies. In this context, Powell's decisions in his final year will shape the US economic trajectory well beyond his exit, especially as new fiscal measures come into play—more on that ahead.

So, cutting too soon has risks. Conversely, if monetary policy adjustments are delayed, some analysts argue it could put the labor market in possible peril. Many economic forecasts suggest US GDP growth may be subdued in 2025. The first quarter showed negative growth (subject to revision), and factors such as tariffs and ongoing uncertainty could potentially hinder economic activity, possibly leading consumers and business executives to be more cautious with spending and investment.

If this sounds like a conundrum, you’re right. We've seen the smartest folks on Wall Street check in and out of the recession court already this year, while market-based recession arenas popped and dropped. In such a volatile macro environment, the Fed has been like so many other market participants—simply holding the ball, and avoiding taking risky shots. 

US Recession Chances Halved

Source: Kalshi

The FOMC will eventually have to step into the paint and make a move. Small businesses are struggling, consumers are racking up debt, and the housing market remains at a near-standstill. For now, Powell may be able to afford to keep the status quo. 

Our investment team has been encouraged by price action—as rate cut odds dwindle for upcoming meetings, stocks have performed well. What’s more, the S&P 500 has lifted back toward all-time highs despite all of the macro and monetary policy uncertainty. Yes, cyclical corners of the economy would surely benefit from easier short-term rates, but we don’t think deferred easing is a death knell to the new economy.

The Trump 2.0 Economy Revealed

President Trump is nonstop. He derives energy from dealmaking and keeping his allies, partners, and adversaries on edge. While easing the tax burden on working families and businesses and cutting the bureaucratic red tape remains a priority, perhaps the most landmark set of events in Trump 2.0 occurred in the Middle East.

In May, the president embarked on a trip to oil-rich Gulf countries, including Saudi Arabia and Qatar, to promote America. Dozens of CEOs joined him. NVIDIA’s Jensen Huang, Amazon’s Andy Jassy, IBM’s Arvind Krishna, and Palantir’s Alex Karp partnered with Trump to secure massive new investments into tech and AI. 

The US possesses significant strengths in technological innovation, being home to many leading global technology companies, often referred to as the 'Magnificent Seven'. Individual leaders and state-sponsored funds domiciled in the Middle East recognize that they must diversify from oil, and the US is their only legitimate suitor. The likes of Saudi Arabia and the UAE could be important long-term buyers of US Treasuries, too.  WTI crude oil, by the way, remains at its cheapest price for this time of year since 2020.

Big Deals in the Middle East

Source: Fox News

More than $2 trillion of deals were inked, including a $600 billion investment commitment from Saudi Arabia and a $1.2 trillion economic exchange agreement with Qatar. But technology was not the sole focus. Defense contractors, including Boeing, landed orders, while retailers also benefited from Trump brokering agreements. 

These geopolitical and economic shifts could present challenges for China's relative global economic positioning. The developed world and oil-rich Mid-East nations appear to be joining forces, bypassing what the world’s second-largest economy has to offer. Couple Trump’s Middle East tour—the first major international excursion of his second term—with a tough tariff policy against China, and may contribute to evolving global economic and political alignments. 

Tax Cuts and Deregulation: The Dessert After Tariffs

Powell must take into account increased investment from abroad and new alliances that may spur economic growth at home. Also becoming front and center are expansionary tax cuts and deregulation. 

Trump campaigned on tariffs, for sure, but he also aimed to make permanent many of the provisions from his signature 2017 Tax Cuts and Jobs Act (TCJA). That legislation is set to expire at the end of 2025, so Congress must act to avoid a massive tax hike on households and businesses.

Trump’s “Big, Beautiful Bill” may not be fleshed out until well into the third quarter, but we have a sense of the framework. All of the TCJA’s income tax breaks will be extended, the new plan will likely eliminate federal tax on some tips and overtime pay (up to a certain income threshold), there may be a temporary boost to seniors’ standard deduction and a tax-shelter for some Social Security income, the Child Tax Credit may be temporarily increased, and new “MAGA Accounts” could be created for children born from 2025 through 2028. 

To pay for the tax-cut extensions and new cuts, increases to university endowment taxes may be pushed through, along with a new 5% excise tax on certain payments to foreign residents.

Republican Tax Plan Summary

Source: Allio

While not set in stone, such tax proposals are intended by their proponents to provide financial relief to taxpayers and business owners, particularly those who have faced economic challenges. Following extensive discussion of tariffs, often described by proponents as a necessary component of economic strategy, attention is also turning to potential tax cuts. The narrative shift is not without its critics, however. As tax negotiations continued on Capitol Hill, Moody’s cut the US credit rating by one notch to Aa1, matching what its peers S&P and Fitch did many years ago. The announcement is a reminder that fiscal matters are important given reckless federal spending in recent years, but we don’t see Moody’s proverbially blocking any of Trump’s shots.

Elsewhere, deregulation is on the docket for 2026 and beyond. This is a squishier topic—it's difficult to pin down what changes are in store, but we can see it in confidence returning to capital markets. M&A, IPOs, and increased capex (not driven by government stimulus) appear to be back on the rise. 

The Biden Administration tacked on nearly $2 trillion in new regulations from 2021 through 2024—more than $20,000 per American family. EPA rules, auto restrictions, DEI, hoops for domestic oil & gas companies to jump through, and financial industry roadblocks stymied growth. The process of reversing some of these regulations is underway, with proponents arguing this could foster an environment more conducive to private sector leadership in the years ahead.

Dalio warns of rising debt risks, but tax cuts paired with a slimmed-down government could stabilize deficits, aligning with his 3% GDP deficit target. It will be a tough road to get there after years of 5%-plus annual budget shortfalls. Some economic viewpoints suggest that fiscal policy's role as a primary driver of economic growth should be re-evaluated, with a greater emphasis placed on empowering job creators and taxpayers through other means. 

Troubling Trend: US Budget Deficits by President

Source: BofA Global Research

Consumer Trends: Sour Sentiment, Summer Plans

Powell remains in “wait and see” mode to see how tax changes, deregulation, and new international capital infusions evolve in the quarters to come. Consumer sentiment surveys indicate concerns about a potential return of inflation, with some attributing these fears to the impact of tariffs. 

According to the May 2025 preliminary University of Michigan Surveys of Consumers, sentiment is at the second-weakest level in history (since data goes back to 1981). One-year inflation expectations hit a new all-time high at 7.3%, but few mainstream economic models currently project the CPI rate reaching such levels over the coming 12 months. Market-based breakeven inflation gauges and so-called “inflation swaps” point to just 3-4% year-ahead inflation. While that’s above the Fed’s 2% objective, beyond the middle of 2025, inflation is seen under 3%, eventually returning to the Fed’s goal. 

According to AAA, Americans will be traveling and enjoying life at a record pace to begin summer—45.1 million people were said to hit the roads and fly the friendly skies over Memorial Day. Bank of America reports that travel activity will pick up, with 70% of respondents vacationing this summer, up from 2024’s percentage. So, while folks are impacted by negative mainstream media headlines, they are unlikely to cool their heels as temps heat up. Mother’s Day spending was also stout, per estimates from the National Retail Federation.

More Americans Expected to Travel this Summer

Source: Bank of America Institute

While the Fed moved aggressively to cut rates in the lead-up to the 2024 election, a 4.33% policy rate alone is unlikely to sideline the economy. Clarity will come about by year-end, and we could see modest easing by the FOMC. Rather than a barrage of quarter-point cuts in the short run, it might just be a buzzer-beater or two of easing led by Powell through May 2026. 

A Corporate Profit Boost

One often overlooked macro factor helping multinational corporations is a weaker dollar. The Trump team wants a softer greenback so domestic manufacturers stand a better chance of exporting overseas. Thus, the drop from 110 to 100 on the US Dollar Index (DXY) is a welcome development. For large firms, it means there’s a benefit to repatriating international sales back home; if the dollar continues drifting lower, it could potentially lead to improved EPS revisions for multinational corporations. 

Crude oil, mentioned previously, is cheap relative to the last four years. WTI and Brent prices haven’t been this low at this point on the calendar since May 2020—when Trump was last in office. With so many families packing up to embark on summer travels, and as firms ramp up investment plans after the volatile start to 2025, cheaper energy costs help.

WTI Crude Oil: Cheapest Since 2020

Source: TradingView

The Bottom Line

Powell won’t go down as the GOAT of Fed chairs. Some critics argue that delays in tightening monetary policy in 2022 were a contributing factor to inflation reaching nearly 10%. The FOMC has also painted itself into an unnecessary corner of inflexibility today, unwilling to adjust its target rate to fast-changing macro events. Still, he has done Youman's work amid attacks from many critics. His last dance—the final year of his tenure as Fed chief—won't be easy, but the decisions he and the Fed make will steer the US economy as it emerges from a tough stretch.

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