The Fed and the fateful week

(Dan Tri Newspaper) - The Fed is almost certain to cut interest rates this week, but the drama lies elsewhere: rare internal divisions, political pressure from the White House, and the question of who is actually present at the meeting table.

A difficult economic problem: Milder version of stagflation.

In theory, the task for Fed Chairman Jerome Powell and his colleagues at the September 16-17 meeting is quite clear: to deal with an economy that is sending mixed signals.

However, the reality is far more complex. The U.S. economy is facing a dilemma, described by economists as "a milder version of stagflation"—a nightmare scenario for any central bank. Stagflation refers to an economy simultaneously facing three main factors: high inflation, slow or no economic growth (economic stagnation), and high unemployment.

On the one hand, there are clear signs that the labor market, a solid pillar of the US economy, is beginning to cool down. This puts pressure on the Fed to act, specifically to cut interest rates to stimulate economic activity and prevent recession, thereby protecting jobs for the people.

On the other hand, inflation remains uncomfortably high, hovering above the Fed's 2% target. This is partly due to the Trump administration's tariff increases, which have both slowed growth and driven up commodity prices.

This is the perfect economic trap. The only tool the Fed has at its disposal to support the job market—lowering interest rates—risks adding fuel to the flames of inflation.

Powell is walking an extremely thin tightrope: Too much easing will cause inflation to explode. Too much tightening too soon could plunge the economy into recession. The widely anticipated 0.25 percentage point cut is seen as a middle ground, an attempt to appease both sides without completely satisfying either.

The Fed's interest rate policy committee met for two days, Tuesday and Wednesday, with its decision to be announced at 2 p.m. Wednesday (Eastern Time). This upcoming decision will shape not only the economy but also the future of the Fed itself (Photo: Reuters).

Internal disagreements have reached historical levels.

If the economic problems are already a headache, the situation inside the Federal Open Market Committee (FOMC) is even more tense. The Fed is deeply divided on the path forward, and this week's meeting could see historically high levels of public opposition.

One faction, known as the "hawks," is concerned that inflation risks remain high. They argue that cutting interest rates at this time is premature and could cause inflation to spiral out of control. They prefer to keep interest rates unchanged to ensure price stability.

Conversely, the "dovish" camp focuses on signs of weakness in the labor market. For them, the risk of recession and job losses is a greater threat. They advocate for more aggressive interest rate cuts to prevent an economic collapse.

This polarization was so intense that Matt Luzzetti, chief economist at Deutsche Bank, commented: "This could be the first meeting since 1988 where three governors voted against, and possibly the first time since September 2019 that there has been opposition from both sides."

A vote with disagreement from both sides (some wanting steeper cuts, others wanting to keep things unchanged) would be an extremely unusual signal, indicating a lack of consensus and confusion within the policymaking body. This would make Chairman Powell's task of communicating a clear and consistent message to the market nearly impossible.

The Fed's independence is being challenged like never before.

As if internal conflicts and economic challenges weren't enough, the Fed is now facing a direct and systematic attack from the executive branch, pushing the central bank's independence to a historic test.

At the heart of this political crisis revolves around two figures: Governor Lisa Cook and candidate Stephen Miran.

First, President Trump is seeking to fire Governor Lisa Cook, alleging she falsified mortgage records before joining the Fed. This is an unprecedented move, challenging the core principle that Fed governors are protected from political interference so they can make decisions purely based on economic data. The case is awaiting a ruling from the appeals court, and a decision could be made just before the meeting, creating a cloud of uncertainty.

Secondly, alongside removing a governor, the White House is using a fast-track process to have the Senate confirm Stephen Miran, currently President Trump's Chairman of the Council of Economic Advisors and one of the Fed's harshest critics, to fill the vacant seat on the Board of Governors. If confirmed in time for Monday, Miran could be sworn in and immediately participate in the policy meeting on September 16th.

Derek Tang from LH Meyer warned of the long-term consequences: "Increasingly, people will tend to view Fed governors through the lens of who appointed them, rather than seeing them as objective decision-makers. And that is becoming increasingly difficult to avoid."

The politicization of the Fed risks eroding global market confidence, which is built on the institution's credibility and independence.

Powell's performance

Amidst the whirlwind of economic and political events, all eyes will be on Chairman Jerome Powell in the press conference following the interest rate decision. How he navigates the meeting, answers questions, and delivers his message will reveal the Fed's direction in the coming months.

Experts are also divided on Powell's strategy:

Cautious scenario: Antulio Bomfim, a former advisor to Powell, suggests the Fed chairman will be very cautious. He will likely try to dampen market expectations of another rate cut in October, emphasizing that inflation risks remain high and the labor market has not collapsed to the point where urgent action is needed.

According to this scenario, the next rate cut might have to wait until December. Bomfim also believes that external political pressure could inadvertently lead Fed members to unite more to protect the institution.

Proactive scenario: Conversely, Matt Luzzetti of Deutsche Bank predicts Powell will signal three interest rate cuts this year (September, October, and December) to preemptively prevent a more pronounced weakening of the labor market. This is an "insurance" strategy to ensure continued economic growth.

Vincent Reinhart, a former Fed official, offers an interesting perspective: Powell might opt ​​for the safe option of a small rate cut, while allowing dissenting members to express their views through a "dot plot"—where each official anonymously forecasts the future interest rate path. This is a way to maintain superficial unity in the overall decision, while still acknowledging underlying divisions.

The upcoming week for the US Federal Reserve will go down in history, but perhaps not because of the 0.25 percentage point rate cut decision, as the market had already anticipated that.

This is a test of Jerome Powell's leadership, of the resilience of an independent institution under attack, and of the world's most powerful central bank's ability to steer the economy through one of the most complex and uncertain periods in recent history.

Source: https://dantri.com.vn/kinh-doanh/fed-va-tuan-le-dinh-menh-20250914212812341.htm