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Powell is facing a triple dilemma of economic crisis, political pressure, and internal divisions. Economically, the threat of tariffs from the trade war has increased the risk of stagflation, and the Federal Reserve needs to weigh the decision to lower interest rates to stimulate demand against maintaining high rates to control inflation; politically, although the Trump administration claims not to interfere with interest rate policy, executive orders and actions from the Justice Department indirectly threaten the independence of the Federal Reserve; internally, there are divergent positions among FOMC members, with shifts from dovish to hawkish stances, and increasing political ambitions complicating policy-making and internal coordination, requiring Powell to respond cautiously.
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Powell is caught in a triple dilemma of economic crisis, political pressure, and internal divisions.
On March 18, Nick Timiraos, known as the 'New Federal Reserve Correspondent,' published an article in the Wall Street Journal that deeply analyzed the dilemmas faced by Federal Reserve Chair Powell.
The article notes that with only one year remaining in Powell's term, he is facing the most complex challenges of his career: on one hand, the tariff threats that could lead to stagflation, and on the other, the aggressive political pressure from the Trump administration; more concerning is that his 18 policy committee colleagues are heading in completely different directions.
This means Powell needs to maintain the Federal Reserve's independence amid trade wars and potential policy interventions while balancing different voices internally.
Timiraos compared Powell to a 'duck': appearing calm on the surface, neither dovish nor hawkish, but constantly paddling beneath the murky waters.
The threat of stagflation is rising
Timiraos's article begins by highlighting the core dilemma faced by Powell: the threat of economic stagflation.
The article points out that the rise in tariffs from the trade war could push up prices, while economic growth may stagnate or slow down as a result. This forces Federal Reserve officials to make a tough choice between lowering interest rates to stimulate demand or maintaining high rates to suppress inflation.
The article cites the view of GlobalData TS Lombard economist Dario Perkins, who stated:
'If the Federal Reserve cuts rates now, it’s likely only because the economic situation has worsened.'
This sentence accurately summarizes the dilemma Powell faces—he must find a balance between controlling inflation and maintaining economic growth; otherwise, the Federal Reserve will be caught in a dilemma.
Timiraos stated that the risk of inflation reigniting is building up: reduced immigration and government cutbacks could influence labor supply and demand, while significantly raising tariffs could create 'the worst combination of economic stagnation and rising prices.'
The article also specifically mentioned the Federal Reserve's mistakes in dealing with inflation during the pandemic in 2021.
At that time, the Federal Reserve viewed the price increases as 'temporary,' ultimately being forced to quickly tighten policy and raise rates significantly. This 'cautionary tale' has made Powell and his colleagues more cautious in policy-making and more attentive to the impact of the trade war on inflation.
Timiraos believes that the new Treasury Secretary now suggests the Federal Reserve should treat tariff-induced inflation as a temporary phenomenon, but this may be a dangerous recommendation.
Trump's 'Interference' with Independence
Compared to Trump's first term, the political pressure faced by the Federal Reserve may be even greater now.
Although the Trump administration claims it will not interfere with interest rate policy, its actions seem to have indirectly threatened the Federal Reserve's independence.
According to the article, Trump's former National Economic Council Director Kevin Hassett criticized the Federal Reserve's handling of inflation issues during an interview.
An executive order issued by the Trump administration last month granted the government oversight over the Federal Reserve's regulatory agenda, although exempting monetary policy, the execution remains ambiguous, indirectly limiting the Federal Reserve's independence.
More worrisome is that Trump's Justice Department is seeking to overturn a legal precedent established in 1935 that protects the independence of regulatory agencies. If this precedent is overturned, it would significantly weaken the Federal Reserve’s autonomy, making it more susceptible to political interference.
Colleagues with 'different dreams on the same bed'
The challenges Powell faces come not only from external sources but also from within.
Timiraos pointed out that there is a divergence in the positions of FOMC members, with some former 'doves' becoming 'hawks' and vice versa.
The article also specifically mentions two Federal Reserve governors: Waller and Bowman.
Waller is seen by some as a potential successor to Powell, and he has recently shown a more 'dovish' stance on interest rate cuts. In December last year, Waller used a Trump-style metaphor to describe the Federal Reserve's fight against inflation:
'I feel like an MMA fighter, choking inflation in a headlock, waiting for it to tap out.'
Bowman was nominated as the Vice Chair for Supervision of the Federal Reserve after Trump took office, and she has publicly opposed the Federal Reserve's interest rate cut policy.
These differing positions and political ambitions make it necessary for Powell to be more cautious in policy-making, further complicating internal coordination within the Federal Reserve.