「New Fed Press」: Neither Dovish Nor Hawkish, Powell Now Looks More Like a 'Duck'

Original Article Title: "The New Fed Wire: Neither Hawk nor Dove, Powell Now Looks More Like a Duck"

Original Article Author: Laughing Lee, Wall Street News

Powell is now caught in a triple dilemma of economic crisis, political pressure, and internal discord.

On March 18, Nick Timiraos, known as the "New Fed Wire," published an article in The Wall Street Journal, delving into the dilemma facing Fed Chairman Powell.

The article points out that as Powell's term is nearing its end, he is facing the most complex challenge of his career: on the one hand, the threat of tariffs that could lead to stagflation, on the other hand, relentless political pressure from the Trump administration, and more worrisome, his 18 fellow policy committee members are heading in completely different directions.

This means that Powell needs to maintain the Fed's independence in the midst of a trade war and potential policy interventions, while balancing different voices internally.

Timiraos likens Powell to a "duck": appearing calm on the surface, neither hawk nor dove, but constantly paddling underwater in murky waters.

Stagflation Threat Heating Up

Timiraos's article begins by pointing out the core dilemma Powell faces: the threat of economic stagflation.

The article notes that the tariff hikes from the trade war could push up prices, while economic growth could stall or slow as a result. This forces Fed officials to make a difficult choice between lowering interest rates to stimulate demand or maintaining high rates to curb inflation.

The article quotes the view of Dario Perkins, an economist at GlobalData TS Lombard, saying:

"If the Fed cuts rates now, it is likely only because the economic situation has gotten worse."

This statement accurately summarizes the dilemma Powell faces—he must find a balance between controlling inflation and sustaining economic growth, or else the Fed will be in a dilemma.

Timiraos states that the risk of inflation re-igniting is accumulating: a decrease in immigration and government cutbacks could affect labor supply and demand, while a significant increase in tariffs could create the "worst combination of economic stagnation and price increases."

The article also specifically mentions the Fed's missteps in dealing with post-pandemic inflation in 2021.

At that time, the Fed considered the price increase to be "transitory" and was eventually forced to rapidly tighten policy and raise rates significantly. This "lesson from the past" 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 today, the new Treasury Secretary suggests that the Fed should view tariff-induced inflation as a temporary phenomenon, but this may be a risky suggestion.

Trump's Interference with Independence

Compared to Trump's first term, the Fed now may face greater political pressure.

Although the Trump administration stated that it would not interfere with interest rate policy, its actions seem to have indirectly threatened the Fed's independence.

According to the article, Trump's former Chairman of the Council of Economic Advisers, Kevin Hassett, criticized the Fed's handling of inflation in an interview.

An executive order issued by the Trump administration last month granted the government oversight of the Fed's regulatory agenda, exempting monetary policy, but the execution remains ambiguous, indirectly restricting the Fed's independence.

More worrisome is Trump's Justice Department seeking to overturn a 1935 legal precedent that protects regulatory agency independence. If this precedent is overturned, it would significantly undermine the Fed's autonomy, making it more susceptible to political interference.

"Colleagues with Different Agendas"

Powell's challenge comes not only from external factors but also from within.

Timiraos points out that FOMC members' positions are becoming more divergent, with some former doves turning into hawks and vice versa.

The article specifically mentions two Fed governors: Wall and Bowman.

Wall is seen by some as a potential successor to Powell, displaying a more dovish stance on rate cuts recently. In December last year, Wall used a Trump-style analogy to describe the Fed's fight against inflation:

"I feel like an MMA fighter, choking inflation, waiting for it to tap out."

On the other hand, Bowman was nominated as the Fed's Vice Chair for Supervision after Trump took office, openly opposing the Fed's rate-cutting policy.

These differing positions and political aspirations make Powell's policy-making need to be more cautious and increase the difficulty of internal coordination at the Fed.

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