Powell's Last Struggle? New Federal Reserve Communications: Rate Cuts are a Difficult Choice Weighing "Political" and "Economic" Pressures

On Thursday, renowned financial journalist Nick Timiraos, known as the "New Federal Reserve Correspondent," wrote that when the Federal Reserve announced an interest rate cut on Wednesday, it appeared to be just a routine monetary policy operation, but in reality, it might represent Powell's "last-ditch effort" to prove the independence of the Federal Reserve and fulfill its "dual mandate."

As Powell's term as chairman is set to end in the spring, he is facing unprecedented political opposition and economic uncertainty.

The core argument of the article suggests that Powell is engaging in a high-risk policy gamble—choosing to cut interest rates without clear signals of an economic recession. This is his third attempt at such a delicate maneuver during his tenure, not cutting rates due to an imminent recession, but rather to prevent one from occurring.

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

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

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

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

Powell stated on Wednesday that when the Federal Reserve agreed to keep interest rates unchanged seven weeks ago, "the labor market was in good shape." However, the latest revisions show that the three-month average job growth for August was revised down from an initially reported 150,000 to 29,000, revealing the true weakness of the labor market. As Powell noted, this data indicates "there are indeed significant downside risks."

Some economists believe that the Federal Reserve's actions are 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 accelerates again after slowing to current levels unless a recession occurs in between.

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

The Trump administration's policy experiments—including immigration restrictions that limit labor growth and broader tariffs than during the first term—may be permanently altering the economy's capacity to produce goods and services. This has raised particular concerns among some experts 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 Federal Reserve will reduce inflation, ordinary people will believe it too. There is a disconnect here. Ordinary Americans are very concerned about inflation, and worries about inflation drove the last election. After years of high inflation, consumers and businesses may become more accustomed to regular price increases, allowing higher inflation to persist.

Difficult Balance Under Political Pressure

In this complex situation, how can Powell maintain consensus within the Federal Reserve? This is undoubtedly a significant test of his leadership abilities Despite differing views on the outlook and facing significant political pressure, Powell has managed to maintain consensus for now. This week, three Federal Reserve officials—who are all regional Federal Reserve Bank presidents—expressed concerns about inflation but still supported the rate cut decision on Wednesday. Two Federal Reserve governors who voted against the decision in July also backed this action.

Notably, the only dissenting vote this week came from Federal Reserve Governor Stephen Milan, who was a senior advisor 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-percentage point rate cut and expects rates to drop to just below 3% by the end of the year.

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

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

Additionally, 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 whether spending will eventually weaken as income growth slows or if it can be sustained by other forces.

Overall, the policy experiment that Powell is conducting may determine the future independence and effectiveness of the Federal Reserve. Caught between political pressure and economic realities, he must prove that an independent central bank can still effectively address complex economic challenges, which 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 outcomes might Powell's "policy gamble" bring?

The article points out that history provides us with three possible scenarios as references:

The most ideal outcome would be a repeat of the "soft landing" successfully achieved by the Federal Reserve in the mid-1990s. At that time, the Federal Reserve successfully extended the economic expansion period without triggering a surge in inflation by appropriately adjusting the pace of interest rate hikes, which is considered the "holy grail" achievement that every Federal Reserve Chair aspires to replicate.

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

Additionally, in 1990, 2001, and 2007, rate cuts failed to prevent recessions, reminding us of the limitations of monetary policy.

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