Global equity investors have had an especially painful couple of days. Following Liberation Day, tonight's US jobs report could be the next major indicator of where markets might be headed. The US has suffered a significant sell-off, with the S&P 500 Index (SP: .INX) experiencing its worst day in five years, falling nearly 5%. At the time of writing, the iShares S&P 500 AUD ETF (ASX: IVV), which tracks this index, is down 3.13%.

Trump's tariffs threaten to slow global growth, reignite inflation, and cause uncertainty in the global economy.

The Fed in a tough spot

There's been a lot of discussion about how the Federal Reserve would respond to tariffs. 

In March, Federal Reserve Chairman Jerome Powell noted that the US economy faces uncertainty. He referred to the Trump administration's "significant policy changes" related to trade, immigration, fiscal policy, and regulation. 

Chairman Powell also said:

It's the net effect of these policy changes that will matter for the economy and for the path of monetary policy…Uncertainty around the changes and their effects on the economic outlook is high.

The Federal Reserve sets interest rates with the objective of achieving price stability and maximum employment. Typically, inflation and economic growth rise together. This signals to the Fed to raise rates. Conversely, when inflation and growth slows, it signals to the Fed to cut rates. 

However, this time, inflation appears to be on the rise, while growth is expected to slow. 

That's an uncomfortable equation for the US Federal Reserve. One indicator is suggesting to cut interest rates while the other is a sign to raise them. 

Stagflation

This scenario describes 'stagflation'. While the term was first coined in the United Kingdom in 1965, it is most commonly associated with the United States in the 1970s. That period was marked by high inflation and high unemployment, which eroded purchasing power and destabilised the economy. Since 2022, experts have been claiming the US may be on the cusp of another period of stagflation. In recent weeks, such claims have grown more frequent. 

Tonight's jobs report in focus

When setting interest rates, the Federal Reserve evaluates several macroeconomic indicators, one of which is the US jobs report. Weakness in the labour market may tip the scales in favour of cutting rates. 

Tonight will also be the first time Federal Reserve Jerome Powell has commented on the likely impact of Trump's tariffs after the details were revealed on 'Liberation Day'.

He is due to speak at the annual conference of the Society for Advancing Business Editing and Writing, where he is expected to provide remarks on the US economy. No doubt, all eyes will be on Jerome Powell tonight. Any mention of 'recession' or 'stagflation' is likely to attract extra attention.