Thirty years of "activism" may come to an end as the Federal Reserve faces a turning point in the era

Last week, the monetary policy meeting held by the Hoover Institution at Stanford University was themed "Finishing the Job," ostensibly focusing on how the Federal Reserve can gradually lower interest rates while bringing inflation back to the 2% target. However, the signals conveyed during the meeting are thought-provoking; this "task" may never truly be completed, and the role of the Federal Reserve as the executor is also facing redefinition.

Over the past 30 years, from Greenspan to Powell, the Federal Reserve has played the role of an "active intervener" in the market. From interest rate adjustments in the 1990s to the era of quantitative easing that began after the 2008 financial crisis, and to the unprecedented asset purchases during the COVID-19 pandemic, the Federal Reserve has evolved from a mere monetary policy maker to a "super central bank" for crisis response.

However, during this meeting, a consensus quietly emerged that this era is nearing its end. The future Federal Reserve may be more restrained, more limited, and even undergo a fundamental transformation in its functions.

The current policy tools and theoretical framework of the Federal Reserve are facing increasing scrutiny. According to the Zhitong Finance APP, Purdue University’s business school dean and former St. Louis Fed president, Charles Evans, pointed out that the traditional "price stickiness" model is no longer applicable. He believes that prices now adjust rapidly, while contract systems are more rigid, thus the Federal Reserve's role should not only be to control inflation but also to ensure the predictability of currency to support the contractual system in economic operations.

Harvard University professor and former chief economic advisor to the White House, Jason Furman, criticized the Federal Reserve for its "framework confusion," stating that the frequently changing data indicators leave the market and the public at a loss. He called for the Federal Reserve to adopt clearer, more predictable rule-based guidance rather than reacting to every situation on the fly.

Cleveland Fed's new president, Loretta Mester, suggested re-examining the role of the Federal Reserve's balance sheet, particularly the long-term effects of quantitative easing and tightening policies. Her predecessor, now a professor at Wharton, also noted that the current policy decision memos are too brief, leading the market to overanalyze Chairman Powell's words, which affects market stability.

Powell took office with a pragmatic centrist image but became a "firefighter" due to the COVID-19 pandemic, at one point lowering interest rates to zero and initiating large-scale asset purchases to stabilize the market. Later, faced with high inflation, Powell quickly pivoted to initiate the fastest rate hike cycle in decades.

Now, the Federal Reserve has achieved initial results, with inflation easing somewhat. However, with Trump re-entering the policy arena, his tariff measures and other policies may once again disrupt the price system. Stephen Brown of Capital Economics predicts that the U.S. core CPI may rise to 3.5% by the end of the year. Apollo's chief economist, Torsten Slok, even warned that the U.S. may face a "stagflation-like" situation with high prices and low growth, and the Federal Reserve may be powerless to address it.

Powell is still striving for a "soft landing," but his term will expire in May next year, and the market generally expects Trump to nominate a successor as early as this fall. At that time, this action may be taken over by another person, and the outcome remains uncertain The outside world generally predicts that Powell's successor will be former Federal Reserve Governor Kevin Warsh, a figure who has long criticized the Fed's crisis intervention model. Warsh advocates that the central bank should "take a back seat," reduce its balance sheet, limit the expansion of its responsibilities, and no longer excessively intervene in the market. He has publicly stated that "broad goals" such as climate change, wealth disparity, and financial stability should be removed from the Fed's task list, with the sole objective being to control inflation.

Another key figure is current Federal Reserve Governor Michelle Bowman, who is the nominee for Vice Chair for Supervision appointed by Trump, and also leans towards loose regulation. Their attendance at meetings has already indicated a shift within the Fed.

The Federal Reserve is expected to announce the results of a new round of policy framework review this summer, but many insiders are skeptical, believing that the new framework is likely just a transitional document before the leadership change. Mester expects the changes to be relatively mild, possibly including a more symmetrical inflation target setting and clearer forecasting methods; while former Federal Reserve economist Andrew Levin warns that the internal checks and balances and transparency of the Fed are weakening, and reforms must be based on a clearer governance structure.

Under the leadership of Warsh and his ideology, the Federal Reserve will be more restrained and focused, but it may also appear "under-armed" in the next financial crisis. Furman summarized: "We are in a whole new economic phase." Even without Trump's new round of tariffs, he doubts whether inflation can really decline further