"New Federal Reserve News Agency": Neither dove nor hawk, Powell now looks more like a "duck".

Timiraos likens Powell to a ‘duck’: seemingly calm on the surface, but constantly paddling beneath the murky water.

Written by: Li Xiaoyin

Source: Wall Street Journal

Powell is caught in a threefold dilemma of economic crisis, political pressure, and internal divisions.

On March 18, Nick Timiraos, known as the “New Fed Correspondent,” published an article in the Wall Street Journal analyzing the predicament faced by Federal Reserve Chairman Powell.

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

This means that Powell needs to maintain the independence of the Federal Reserve amidst the trade war and potential policy interventions, and keep a balance among different voices internally.

Timiraos compares Powell to a “duck”: seemingly calm on the surface, neither dovish nor hawkish, but constantly paddling in murky waters.

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 brought about by the trade war may drive up prices, while economic growth could 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 rates to curb inflation.

The article quoted the views of GlobalData TS Lombard economist Dario Perkins, stating that:

“If the Federal Reserve cuts interest rates now, it is likely only 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, or else the Federal Reserve will face a dilemma.

Timiraos stated that the risk of inflation reigniting is building up: a decrease in immigration and government cutback plans 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 the year 2021.

At that time, the Federal Reserve believed that the price increases were “transitory,” and was ultimately forced to rapidly tighten policies and raise interest rates significantly. This “lesson from the past” has made Powell and his colleagues more cautious in policy-making, and more attentive to the impact of trade wars on inflation.

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

Trump “stirring the pot” interferes with independence

The Fed is likely to face more political pressure now than it is during Trump’s first term.

Although the Trump administration has stated that it will not interfere with interest rate policy, its actions seem to have indirectly threatened the independence of the Federal Reserve.

According to the article, Kevin Hassett, former chairman 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 exempting monetary policy, the execution method remains ambiguous and indirectly limits the independence of the Federal Reserve.

Even more concerning is that Trump’s Department of Justice is seeking to overturn a legal precedent established in 1935 that protects the independence of regulatory agencies. If this precedent is overturned, it would greatly weaken the autonomy of the Federal Reserve, making it more susceptible 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 on 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 lock hold, waiting for it to give up.”

Baumann 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 make it necessary for Powell to be more cautious in formulating policies, and also increase the difficulty of coordination within the Federal Reserve.