Powell's Anticipated Jackson Hole Speech: Caught Between Trump's Hammer and the Economy's Anvil

The world awaits Federal Reserve Chair Jerome Powell's speech at the annual Jackson Hole Economic Symposium, scheduled for Friday evening Beijing time. This address comes amid unprecedented political pressure from former President Donald Trump and mixed economic data, complicating the picture. Can Powell provide a clear roadmap for the future?

Trump has long criticized the Federal Reserve's policies, demanding significant interest rate cuts. This political pressure puts Powell in a difficult position, forcing him to balance the President's demands with economic data and maintain the central bank's independence.

On the other hand, there are strong investor expectations for a rate cut at the upcoming September meeting, driven by some indicators suggesting a potential slowdown in the labor market. Two members of the Federal Reserve Board pointed out at the last policy meeting that the labor market might be weaker than the overall employment figures suggest.

However, inflation remains above the Federal Reserve's 2% target. As the costs of tariffs imposed by Trump pass through to retail prices, inflation expectations could rise further. Some policymakers believe these price increases could continue into next year, making an interest rate cut at this time a risky move.

Kansas City Federal Reserve President Jeffrey Schmid warned that cutting interest rates amid rising inflation could send a dangerous signal to consumers and damage the Federal Reserve's credibility in controlling inflation. Schmid, who hosts the Jackson Hole meeting, emphasized the importance of maintaining the credibility of inflation expectations.

Will Powell Reveal a New Monetary Policy Framework?

Analysts expect Powell to unveil a new monetary policy framework, aiming to simplify the complex principles announced at the conference five years ago. Powell may resort to a compromise regarding interest rates, potentially opening the door for a cut in September to acknowledge weak job growth and the need to prevent it from worsening, but he will not make further commitments until policymakers are convinced that rising inflation is temporary.

Adam Posen, president of the Peterson Institute for International Economics and former member of the Monetary Policy Committee at the Bank of England, believes that the idea that monetary policy is restrictive does not align with the data. He predicts that the economy will continue to move towards stagflation: rising inflation and slowing growth.

However, Posen believes that a rate cut could be an "insurance" for the labor market, and partly to buy time politically.

Is the Federal Reserve's Independence at Risk?

The political pressure exerted by Trump on the Federal Reserve is considered a threat to its independence. Trump has made harsh personal criticisms of Powell and demanded his resignation. Some within his administration even called for Powell's "firing" due to cost overruns in the renovation of the Federal Reserve building.

However, William English, a professor at Yale School of Management and former head of the Monetary Affairs Division at the Federal Reserve, believes that the Federal Reserve has so far maintained its policy independence. English emphasizes that Congress established the Federal Reserve to be independent of the executive branch, and that this independence will continue as long as Congress and the courts do not change the rules.

But if Federal Reserve Board members resign or are forced to leave prematurely, the White House will have greater influence over monetary policy and the appointment of the 12 regional Federal Reserve Bank presidents.

Ultimately, the question remains: will Powell be able to maintain the Federal Reserve's independence in the face of increasing political pressure and deliver a balanced monetary policy that serves the American economy in the long term? The Jackson Hole speech will certainly be the focus of the world's attention.