Powell's Last Stand? The New Fed News Agency: Rate Cuts Are a Difficult Choice After Weighing "Political" and "Economic" Pressures

Powell must contend with Trump's challenges to the Federal Reserve's traditional independence, while also dealing with complex issues such as slowing growth and sticky inflation. Timiraos believes that Powell's choice to cut rates without clear signs of an economic recession is itself a "policy gamble," which could reignite inflation, increase economic pressure, or even lead to a recession. The ideal outcome would be a repeat of the "soft landing" successfully achieved by the Federal Reserve in the mid-1990s.

Written by: Zhao Ying

Source: Wallstreetcn

On Thursday, Nick Timiraos, a well-known financial journalist dubbed the "New Fed Correspondent," wrote that when the Federal Reserve announced a rate cut on Wednesday, it appeared to be a routine monetary policy operation on the surface, but in reality, it may represent Powell's "last stand" to prove the Fed's independence and fulfill its "dual mandate."

With Powell's term as chairman ending this spring, he is facing unprecedented political confrontation and economic uncertainty.

The core view of the article is that Powell is taking a high-risk policy gamble—choosing to cut rates without clear signs of recession. This is the third time during his tenure that he has attempted such a delicate maneuver, cutting rates not because a recession is imminent, but to prevent one from occurring.

Previously, Trump had repeatedly called for Powell to cut rates immediately, and by a greater margin than he anticipated.

The article also emphasizes that the Federal Reserve is facing extraordinary challenges to its traditional independence, while also dealing with complex issues such as slowing growth and sticky inflation. These factors make current policy decisions more complex and risky than ever before.

Concerns Over Weak Labor Market: Structural Change or Temporary Cyclical Weakness?

What factors prompted the Federal Reserve to make this rate cut decision? The answer largely points to the significant slowdown in the labor market.

Powell stated on Wednesday that when the Fed agreed to keep rates unchanged seven weeks ago, "the labor market was in good shape." But the latest revisions show that the three-month average job growth in August dropped from the initially reported 150,000 to 29,000, a huge difference that reveals the true weakness of the labor market. As Powell said, these data indicate "there are indeed significant downside risks."

Some economists believe the Fed's actions are still not aggressive enough, including this week's 50 basis point rate cut. Jeffrey Cleveland, chief economist at Los Angeles asset management firm Payden & Rygel, pointed out:

Job growth rarely re-accelerates after slowing to current levels, unless there is a recession in between.

In the face of the current complex economic environment, a key question is: Could the Federal Reserve be misreading structural changes as temporary cyclical weakness? This concern is not unfounded.

The Trump administration's policy experiments—including immigration restrictions that limit labor force growth and broader tariff increases than in the first term—may be permanently altering the economy's capacity to produce goods and services. This makes some experts particularly concerned about the risks of excessive rate cuts.

Ethan Harris, former head of global economic research at Bank of America, warned that we should not assume that just because economists believe the Fed will lower inflation, ordinary people will believe it too. There is a disconnect here. Ordinary Americans are very worried about inflation, and concerns about inflation drove the last election. After years of high inflation, consumers and businesses may become more accustomed to regular price increases, making higher inflation more persistent.

A Difficult Balance Under Political Pressure

In this complex situation, how does Powell maintain consensus within the Federal Reserve? This is undoubtedly a major test of his leadership.

Despite differences over the outlook and immense political pressure, Powell has so far managed to maintain consensus. The three Fed officials who voted this week—all regional Federal Reserve Bank presidents—have recently expressed concerns about inflation, but still supported Wednesday's rate cut decision. Two Fed governors who voted against in July also supported this action.

Notably, the only dissenting vote this week came from Fed Governor Stephen Milan, who was still a senior adviser to Trump earlier this week, but was confirmed and sworn in just in time to participate in this meeting's vote. Milan favored a larger half-point rate cut and expects rates to fall to just below 3% by year-end.

Looking ahead, what challenges and opportunities does the Federal Reserve face? Interest rate forecasts highlight the prospect of more contentious debates in the future.

Among the 19 meeting participants, 7 believe no further rate cuts are needed this year, and 2 believe only one more cut is necessary. This division suggests that disagreements may persist regardless of who serves as Fed chair. Powell candidly acknowledged the dual risks of weak employment and persistent inflation—there is no risk-free path. If future data fails to resolve these differences, Powell will face the prospect of defending central bank independence in every risky decision.

In addition, the booming stock market highlights a question: Despite concerns about a weak labor market and stagnation in the housing sector, consumer spending remains stable, and businesses are investing heavily in artificial intelligence infrastructure. The question is, as income growth slows, will spending eventually weaken, or can it be sustained by other forces?

Overall, the policy experiment Powell is conducting may determine the future independence and effectiveness of the Federal Reserve. Caught between political pressure and economic reality, he must prove that an independent central bank can still effectively respond to complex economic challenges. This not only affects the short-term performance of the U.S. economy, but may also influence the future direction of global monetary policy.

Three Possible Outcomes from Historical Experience

So, what possible outcomes could result from Powell's "policy gamble"?

The article points out that history provides us with three possible scenarios for reference:

The ideal outcome would be a repeat of the "soft landing" successfully achieved by the Federal Reserve in the mid-1990s. At that time, the Fed successfully extended the economic expansion without triggering a surge in inflation by appropriately adjusting the pace of rate hikes. This is considered the "Holy Grail" achievement every Fed chair aspires to replicate.

However, history also warns of risks. The premature rate cut in 1967 helped ignite the persistent price pressures of the 1970s, which were further exacerbated by political pressure and misjudgments of economic conditions.

In addition, in 1990, 2001, and 2007, rate cuts failed to prevent recessions from occurring. These cases remind us of the limitations of monetary policy.