Powell’s Caution, CBO’s Fantasy and Illusions That Move Markets, Budgets

In financial history, there is an enduring irony: markets and governments alike are interpreters of ambiguous texts. One has central bank speeches that could rival Talmudic commentary in their opacity, and the other has fiscal projections that make fortune tellers look humble. 

The last few days offered a perfect case study. Jerome Powell, the chair of the Federal Reserve, gave a carefully hedged speech about inflation, rates, and the Fed’s enduring “data-dependence.” Within hours, US stock indexes soared to record highs as if Powell had sworn an oath on Wall Street’s altar: thou shalt cut rates soon, and may profits flow eternal.

At nearly the same time, the Congressional Budget Office issued a report claiming that over the next decade, the United States could save nearly $4 trillion through tariffs, yes, tariffs, that supposedly discredited tool of mercantilism. One could be forgiven for thinking that Adam Smith’s “invisible hand” has been replaced by the magician’s sleight of hand.

Together, these episodes reveal a troubling pattern: markets and policymakers alike may not be merely interpreting reality; they may be manufacturing it to serve their own imperatives. The result could be a self-reinforcing cycle of misreadings, half-truths, and financial theatre. Let us push aside the curtain.

When Jerome Powell takes the podium, his task is deceptively simple - reassure without overcommitting, signal without binding, and appear transparent while saying as little as possible. A Powell speech is less about content and more about the choreography of pauses, hedges, and euphemisms – like many of his distinguished predecessors.

This time, Powell’s remarks were textbook Fed-speak. He acknowledged that inflation had moderated from its peaks but reminded the audience that core inflation remained sticky. He reiterated that the Fed’s dual mandate, employment and price stability, remained in play. He warned against premature easing, noting that “risks remain”.  “In the near term, risks to inflation are tilted to the upside, and risks to employment to the downside—a challenging situation. When our goals are in tension like this, our framework calls for us to balance both sides of our dual mandate.” A sober assessment, finely balanced.

And yet, markets erupted as if Powell had thrown a rate-cutting party. Dow, the S&P 500 and Nasdaq surged to record highs. Some commentators gushed about a “soft landing,” as if Powell had personally piloted the US economy onto a runway of infinite growth.

A possible misreading is not accidental; it is systemic. Markets have become conditioned to extract dovish intent from even neutral language. Every qualifier is a signal, every hesitation an omen. It is a kind of collective hallucination driven not by logic but by profit motives. Traders, after all, are not monks deciphering scripture; they are operators seeking returns. If Powell’s speech can be spun as bullish, it will be.

The real danger here is that markets no longer mirror fundamentals; they mirror themselves. What matters is not what Powell said, but what markets can convince themselves he meant. This self-referential loop creates perverse incentives, which means  the Fed cannot speak too clearly without sparking a panic, while markets thrive on ambiguity, they can arbitrage.

If Powell’s speech was misread as optimism, the CBO’s tariff arithmetic was manufactured optimism. According to the budget office, tariffs, nothing but duties imposed on imported goods, could help reduce the US fiscal deficit by a whopping $4 trillion over the next decade.

On the surface, the math is neat. Tariffs bring in revenue, just like taxes. Raise tariffs, and voila, the Treasury’s coffers swell. Problem solved. The reality is more like patching a leaky roof with chewing gum.

First, tariffs are not free money; they are a tax on consumers and businesses. Higher import duties raise the cost of goods, whether it is steel for manufacturers or shoes for households. Inflationary pressures build, forcing either higher wages or reduced consumption. The supposed “savings” is simply a transfer from consumers’ pockets to the government ledger.

Second, tariffs provoke retaliation. The US may impose duties on Chinese electronics or European cars, but those countries respond with tariffs on US exports such as soybeans, aircraft, and liquefied natural gas. The net effect is often a stalemate or worse: a shrinkage of overall trade flows that depresses growth and undermines tax revenue from other sources.

Third, the CBO’s neat projections assume static behaviour. But global supply chains are not inert. Raise tariffs high enough, and importers reroute sourcing through third countries, employ tariff engineering, or simply relocate production. The result may be that tariff revenues rarely meet projections.

In short, the $4 trillion figure is a fiscal mirage, conjured up to reassure anxious bond markets that the US has a plan for its ballooning deficit. It is less an economic strategy and more a rhetorical device: a talking point dressed up in spreadsheets.

Convenient Illusions
So what connects Powell’s misread speech and the CBO’s tariff fantasy? The answer is that both episodes reflect a deeper dysfunction: the system runs on convenient illusions.

For markets, the illusion is that central banks exist to underwrite asset prices. Every speech is a code to be cracked, every statement a potential profit opportunity. The market does not ask, “What did Powell mean?” but rather, “How can we make money by pretending he meant what we want?”

For government budgeteers, the illusion is that creative fiscal accounting can conjure savings out of distortionary taxes. Instead of grappling with entitlement reform, healthcare costs, or structural deficits, the system turns to tariffs, the economic equivalent of a payday loan.

Both illusions are sustained because they serve immediate needs. Markets crave short-term returns. Governments crave plausible stories to tell bondholders. Truth is optional.

But illusions are not costless. Markets that misinterpret central banks risk creating bubbles that, when they burst, force the Fed into exactly the kind of emergency easing it seeks to avoid. By misreading Powell as dovish, investors set themselves up for volatility when reality disappoints.

Similarly, governments that rely on tariffs as a fiscal panacea ignore the long-term erosion of competitiveness, consumer welfare, and global trust. A tariff-fuelled America may indeed collect billions, but at the expense of lower living standards and strained trade relations.

The larger cost is credibility. Once markets begin to suspect that the Fed cannot speak truthfully for fear of sparking chaos, or once global partners realise that US fiscal projections are based on gimmicks, trust evaporates. And trust, in both monetary and fiscal realms, is the one asset that cannot be printed or tariffed into existence.

The episodes of Powell’s speech and the CBO’s tariff fantasy illustrate a broader truth: modern finance and policy have become less about economics and more about narrative control. Like magicians, they rely on distraction, sleight of hand, and carefully crafted illusions. And like audiences, we, the citizens, the consumers, the taxpayers, often prefer the magic show to the messy reality.

But reality has a way of intruding. Inflation that refuses to obey models. Tariffs that erode supply chains. Deficits that outpace creative accounting. Market bubbles that burst. In the end, no amount of narrative can repeal economic gravity.

The challenge is whether we can reclaim honesty in discourse - whether central bankers can speak without being misread, whether the budget office can project without gimmicks, and whether markets can trade without hallucination. Until then, we remain trapped in a hall of mirrors, applauding illusions while ignoring the cracks beneath our feet.