Will Powell's Prudence Prevail Amid Trade War Uncertainty?
Huatong Finance APP News — Federal Reserve Chairman Powell is caught in a whirlpool of internal and external pressures. Internally, the Federal Open Market Committee (FOMC) has never seen such a rare instance of division; externally, US President Trump's aggressive policies continue to pressure him to loosen monetary policy. However, faced with escalating trade wars, inflation risks, and uncertain economic growth, Powell chose a prudent stance of observing changes while keeping his decisions unchanged. Is this cautious approach a deep-thought wise decision or just a helpless choice before the storm arrives?
Internal divisions and external pressures: Powell's double-edged dilemma
The FOMC's internal rifts have become more apparent in recent times. For the first time in 30 years, two committee members publicly opposed maintaining the current interest rate, urging a rate cut instead. This not only reflects the Committee's divided views on economic prospects but also makes Powell's decision-making process like walking on thin ice. Meanwhile, the Trump administration continues to exert external pressure on the Fed, with President Trump repeatedly calling for Powell to adopt a loose monetary policy to stimulate economic growth. This internal-external dual pressure has made every one of Powell's decisions highly scrutinized, and his cautious stance seems all the more necessary.
Trade war impact shows up: "Faux prosperity" in economic growth
Just hours before Powell's press conference, US data for the second quarter revealed a massive gap between the economy's appearance and reality. On the surface, the GDP growth rate reached 3%, seeming impressive, but upon closer analysis, it is largely attributed to companies stockpiling goods in anticipation of tariffs before their implementation. Goods imports plummeted by 30%, inventories rose sharply, and this "Faux prosperity" concealed weak domestic demand. Data shows that sales to households grew only 1.2%, the slowest since Q4 2022, far lower than Q1's 1.9%. Investment growth also experienced a sharp decline. Economists describe this phenomenon like Mr. Burns' bizarre disease in "The Simpsons": multiple issues arise simultaneously, seeming to cancel each other out, but actually concealing a crisis.
Trade agreement's brief glimmer and new tariffs' shadow
Trump's administration recently reached trade agreements with Japan and the EU, briefly lifting market spirits. However, this optimism was quickly dispelled by new tariff policies. The US has implemented 25% tariffs on India, increased tariffs on Brazil, and slapped a 50% tariff on copper, tightening global trade tensions. Especially, the breakdown of talks with the US's tenth-largest trading partner, India, is seen as an ominous sign, hinting at high-tariff policies becoming a long-term reality. Trump justifies these actions by various reasons — from punishing countries that buy Russian oil to retaliating against Brazil's former president for not fulfilling his campaign promises — and continues to ratchet up tariff pressure, making it difficult to alleviate trade tensions. US companies are already feeling the pressure, such as Ford Motor Company, which revealed a $2 billion increase in costs due to tariffs in Q2.
Inflation risks and presidential pressure: Powell's precarious choice
Facing trade war shocks, Powell hinted that tariffs might lead to sustained inflation growth, attributing this risk to increased consumer inflation expectations. However, just as his term is about to end next year, Powell faces the strongest presidential pressure he has ever experienced in half a century. Trump demands him to ignore these warning signals and prioritize economic growth and employment data. When these seemingly rosy economic indicators conflict with inflation risks, trade war pressures, and weak domestic demand, Powell's decision becomes extremely difficult. A sudden rate cut might exacerbate inflation risks, while maintaining high interest rates could stifle economic growth. In this precarious situation, Powell's cautious approach seems all the more prudent.
Prudent observation: the best solution in the storm
Reuters analyst Gabriel Rubin notes that in the midst of trade war uncertainty and mixed economic data, Powell's cautious stance is undoubtedly a well-thought-out choice. Faced with internal divisions, external pressures, and global economic uncertainty, rashly adjusting monetary policy might lead to even greater risks. Maintaining interest rates unchanged allows the Fed to gain more time to observe economic trends and avoid potential mistakes from premature action. As an ancient adage goes, "Observe the changes, and you will be the master of events." In today's complex and ever-changing economic environment, Powell's cautious approach may be the best solution in the storm.