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, providing an in-depth analysis of the dilemma faced by Federal Reserve Chairman Powell.

The article points out that with only one year left in Powell’s term, he is facing the most complex challenge of his career: on one hand, there is the tariff threat that could lead to stagflation, and on the other hand, there is the aggressive political pressure from the Trump administration. More concerning is that his 18 colleagues on the policy committee are heading in completely different directions.

This means that Powell needs to maintain the independence of the Federal Reserve in the face of trade wars and potential policy interventions, while balancing the different voices within.

Timiraos compares Powell to a “duck”: appearing calm on the surface, neither dovish nor hawkish, but actually paddling furiously beneath the murky water.

The Threat of Stagflation Intensifies

Timiraos’s article begins by highlighting the core dilemma faced by Powell: the threat of stagflation.

The article points out that the increase in tariffs resulting from the trade war may drive up prices, while economic growth may stagnate or slow down as a result. This forces Federal Reserve officials to make a difficult choice between lowering interest rates to stimulate demand or maintaining high interest rates to curb inflation.

The article cites the opinion of GlobalData TS Lombard economist Dario Perkins, stating that:

“If the Federal Reserve cuts interest rates now, it is likely just because the economic situation has worsened.”

This sentence accurately summarizes the dilemma faced by Powell – he must find a balance between controlling inflation and maintaining economic growth, otherwise the Federal Reserve will face a predicament.

Timiraos stated that the risks of inflation reigniting are accumulating: a decrease in immigration and government cutbacks may affect labor supply and demand, while a significant increase in 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 after the pandemic during 2021.

At that time, the Federal Reserve believed that the price increase was “transitory,” only to be forced to quickly tighten policies and raise interest rates significantly. This “lesson from the past” has made Powell and his colleagues more cautious in formulating policies, and more attentive to the impact of the trade war on inflation.

Timiraos believes that today, the new Treasury Secretary suggests that the Federal Reserve should view inflation caused by tariffs as a temporary phenomenon, but this could be a dangerous suggestion.

Trump “interferes” in independence

Compared to Trump’s first term, the political pressure the Federal Reserve faces now may be greater.

Although the Trump administration has stated that it will not intervene in interest rate policy, its actions seem to indirectly threaten the independence of the Federal Reserve.

According to the article, Kevin Hassett, former director of the National Economic Council under Trump, criticized the Federal Reserve’s handling of the inflation issue during an interview.

An executive order issued by the Trump administration last month granted the government the power to oversee the Federal Reserve’s regulatory agenda, although it exempts monetary policy, the execution method remains ambiguous, indirectly limiting the Fed’s independence.

More worryingly, Trump’s Justice Department is seeking to overturn a legal precedent introduced in 1935 that protected the independence of regulators. If this precedent is overturned, it will greatly weaken the Fed’s autonomy and make it more vulnerable to political interference.

Colleagues with Different Dreams

The challenges facing Powell come not only from external sources but also from internal ones.

Timiraos pointed out that the positions of the FOMC members are becoming polarized, with some former “doves” turning into “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 towards interest rate cuts. In December of 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 guillotine hold, 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 publicly opposed the Federal Reserve’s interest rate cut policy.

These different positions and political aspirations require Powell to be more cautious in policy-making and increase the difficulty of coordination within the Federal Reserve.

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