U.S. Bonds Rally While Stocks Fall, What Did Powell Say? Has the Fed Put Option Dream Ended?

TradingKey - Following the "triple whammy" in stocks, bonds, and currency markets triggered by Trump's tariff policies, Wall Street turned its attention to Federal Reserve Chair Jerome Powell. However, Powell’s recent remarks raised concerns about stagflation in the U.S. economy and explicitly rejected the notion of  a "Fed put option." His hawkish tone contributed to a divergence in the performance of U.S. equities and bonds.

On Wednesday, April 16,   speaking at the Economic Club of Chicago, Powell reaffirmed the Fed’s commitment to its dual mandate of price stability and full employment. He emphasised that without price stability, a strong labour market benefiting all Americans over the long term could not be sustained.

Powell also acknowledged that U.S. tariff policies had exceeded expectations, even surpassing the Fed’s upper-end forecasts.  He noted that tariffs would at least temporarily increase inflation, and the effects could prove more persistent than initially expected. He stressed that the Fed could afford to wait for greater clarity before adjusting its policy stance.

He further admitted that the central bank might soon face a challenging trade-off, as its dual mandate goals could come into conflict—balancing inflation control against the need to stimulate economic growth—amid rising risks of stagflation.

When asked whether the Fed would intervene or provide a so-called "Fed put option"  in the event of a market crash, Powell said no. He clarified that while markets were contending with significant uncertainty, they continued to function in an orderly manner.

Following Powell’s speech, the S&P 500 Index accelerated its decline, and the Nasdaq Composite closed down 3%. The Philadelphia Semiconductor Index dropped as much as 7% intraday, and Nvidia (NVDA.US) shares plunged roughly around 10% during the session, closing down 4.10% and 6.87%, respectively.

Analysts at Wells Fargo observed that the market clearly responded negatively to Powell’s comments. Investors had been hoping for some form of a "put option"—a signal that either the Fed or the Trump administration would ease policy in response to economic and market pressures.  With both falling short of expectations and with macroeconomic headwinds and trade tensions mounting, investor appetite for risk has diminished.

EP Wealth Advisors added that investors should not expect monetary policy support for the markets in the near term.

Amid the equity sell-off, the $29 trillion bond market, which had just weathered a "U.S. bond storm" last week, showed resilience.  Treasury prices rallied for the third consecutive trading day. On April 16, the yield on the 10-year Treasury note fell by more than 5 basis points, while the  2-year yield declined by over 7 basis points.

Analysts suggested that Powell's optimistic view of financing conditions and the availability of ample reserves offered some relief to the bond market. He also reiterated that the U.S. banking system remains well-capitalised and resilient to potential shocks.

Analysts noted that global tariff risks had previously threatened the economy and undermined the reputation of U.S. Treasuries as the world’s safest asset. However, the current trading environment in the Treasury market has stabilised compared to earlier this month, prompting a renewed wave of risk-averse sentiment.