US Fed's Mouthpiece: Powell Faces a Lose-Lose Dilemma but Will Persevere Without Cutting Interest Rates

Ahead of the US Fed's interest rate decision, macro reporter Nick Timiraos, known as the "Fed's mouthpiece," published an article, stating the US Fed will not "abandon its fight against inflation prematurely", while pointing out that under the impact of tariff policies, whether or not to cut interest rates, the US Fed will ultimately face a dilemma: either confront an economic recession or wait to manage the more troublesome stagflation.

Clearly, his remarks at this time not only convey policy expectations to the market but also serve as a "precautionary shot" for Trump.

As background, the US Fed will begin its rate-setting meeting on Tuesday and announce the results at 2:00 AM Beijing time on Thursday. Since the market widely expects the interest rate cut period to be at least after June, the focus this week is on how Powell communicates policy amid Trump's repeated calls for rate cuts.

(Market pricing predicts no rate cut this week, source: CME FedWatch)

There will be no "preemptive rate cut"

. Timiraos stated, Fed Chairman Powell and his colleagues are on track to extend their wait-and-see stance on rate cuts and are formulating strategies to refine this stance. This "calculated patience" reflects officials' determination to avoid prematurely abandoning the fight against inflation.

For US Fed officials, the current situation can be summarized as a "binary" dilemma: if they choose to maintain the current policy rate to continue suppressing inflation, it may lead the US economy into a more severe recession; but cutting rates early to mitigate the economic impact of tariffs could exacerbate short-term inflationary pressures from tariffs and supply deficits.

Powell lamented last month that making a judgment is undoubtedly very difficult.

Richard Clarida, senior advisor at Pimco (Pacific Investment Management) and Powell's deputy for three years, said: "This is not a cycle where the US Fed preemptively cuts rates in anticipation of an economic slowdown. They need to see signs of an economic slowdown in specific data, especially labour market data. "

Another former US Fed official who worked closely with Powell for a long time, Lyle Brainard, also said that Powell's policy style is not the "preemptive" type.

She stated: "Over the past seven years, the US Fed under Powell's leadership has adopted a style of waiting for data to become fully clear before acting quickly. It is foreseeable that if the labour market significantly deteriorates, the US Fed will be ready to take action."

Timiraos stated that sometimes the US Fed sets rates in pursuit of the best economic outcome, such as a series of rate cuts after last year's inflation pullback; while at other times, US Fed policy is merely to mitigate the impact of "bad outcomes," such as the aggressive rate hikes during 2022-2023. Tariffs may force them to adopt the latter approach, at least ensuring that the one-time price increase after tariffs take effect does not trigger more persistent inflation.

Powell is expected to speak "hawkishly"

. Since the interest rate policy itself is not in doubt, Wednesday's market change will entirely depend on what Powell says.

From the perspective of monetary policymakers, if Powell makes dovish remarks leaning towards rate cuts, it may not help prevent cost increases or economic slowdowns caused by tariffs. However, if he appears more "hawkish," it could suppress market inflation expectations.

Former Dallas Fed President Robert Kaplan said: "Even if I am thinking about finding a path to rate cuts, I would make hawkish remarks because I want to anchor inflation expectations."

Timiraos pointed out that US Fed officials now agree that rate cuts are inappropriate until specific signs of consumer spending slowdown and rising unemployment are seen.

In fact, among all current FOMC members, only Governor Christopher Waller has publicly called for the US Fed's policy to actively shift to support economic growth. He recently stated, after the current US Fed leadership misjudged the economic situation four years ago, maintaining zero rates for too long and igniting inflation, some courage is now needed to change policy thinking.

The US Fed's broader concerns can be summarized in two points: first, the fear that higher inflation expectations will significantly increase the difficulty of suppressing inflation; second, the concern that supply chain disruptions may cause price pressures to exceed the scope of tariff transmission alone.

Cleveland Fed President Hamack said in a speech last month: "I would rather act slowly but in the right direction than act quickly but in the wrong direction."

Former Boston Fed President Rosengren also noted that in an environment where tariffs and supply deficits are likely to push costs higher, lowering rates initially may exacerbate cost pressure and fail to alleviate economic pressure.

Rosengren also expects that it is easy to envision the US Fed standing pat in the next two to three meetings, and rate cuts will make more sense when the economic deterioration becomes more apparent. He also emphasized that low rates have limited effects on supply chain issues, but as demand begins to weaken, the US Fed may need to take more aggressive 50 basis point rate cuts.