The Wall Street Journal reporter Nick Timiraos recently wrote that the "final test" for Federal Reserve Chair Jerome Powell seems to be achieving a soft landing for the economy. Now, with about a year left in his term, he faces a serious dilemma: navigating a trade war that threatens to drive up prices while weakening the economy.

During his seven-year term, Powell has experienced Trump's first-term trade war, the pandemic, historic inflation, and highly publicized bank failures. His "final exam" also comes with an urgent need to maintain the Fed's political neutrality, which helps protect its monetary policy autonomy.

Timiraos said that Fed policymakers are sometimes referred to as "hawks" fighting inflation or "doves" defending the labor market. Now, Powell seems more like a duck—calm on the surface but paddling furiously beneath the murky water.

In the past two years, inflation has decreased as supply chain bottlenecks eased and labor participation rates increased. But now, the tailwinds are turning into potential headwinds. A decline in immigration and cuts to federal contracts could hurt labor supply and demand. A significant increase in tariffs could lead to a troubling combination of weak growth or even stagnation and rising prices.

The 18 colleagues of Powell participating in the monetary policy meetings have shifted their viewpoints. Some doves have turned into hawks and vice versa. At least one is considering taking over Powell next year.

Last year, after the Federal Reserve raised interest rates to the highest level in twenty years to combat rising prices, it lowered the rates by one percentage point. In January, the inflation rate dropped from a recent peak of 7.2% in 2022 to around 2.5%, and the market generally expects officials to keep rates unchanged at this week's meeting.

Before the latest Trump plunge, acquaintances had tried to congratulate Powell on achieving a soft landing, even if briefly, but the Federal Reserve Chair disagreed. At last month's congressional hearing, he only stated that the economy had avoided recession.

Senator John Kennedy told him: "I call it a soft landing, and I don't know why you don't accept the credit for it."

The Federal Reserve must make a choice.

Trump's latest trade war has made the Federal Reserve's job tricky. When prices are rising but growth is stagnant, officials must choose between cushioning demand by lowering rates and preventing rising prices by keeping rates high.

Dario Perkins, an economist at GlobalData TS Lombard, stated: "If the Federal Reserve does cut rates now, it would really just be because the economy has worsened."

Federal Reserve officials vividly remember how they misjudged inflation when the economy reopened from the pandemic in 2021. At that time, officials initially believed that rising prices would pass as supply chains recovered. They eventually abandoned the argument of 'transitory' and began raising interest rates.

Trump's Treasury Secretary Mnuchin recently stated that Federal Reserve officials should treat price increases related to tariffs as they did initially in 2021. He mentioned at a luncheon in New York this month: "I wish the failed 'temporary team' could get back together, believing that nothing is more temporary than tariffs."

Timiraos stated that if inflation accelerates in the coming months, Federal Reserve officials will carefully analyze the substantive content of the inflation report to look for signs of tariffs (instead of an overheating economy) driving up prices.

Federal Reserve Governor Waller said in a recent interview: "We call it a signal extraction problem. You get this data and try to find out what is the fundamental signal and what is the noise caused by tariffs, which is difficult."

The constantly changing situation is testing not only Powell's economic capability but also his ability to manage a Federal Reserve Board that is tumultuous due to differing judgments and professional ambitions. A Federal Reserve that appears politically colored would weaken its argument for so-called independence.

Will the Federal Reserve become Trump's?

Even before taking office, Trump's election caused a stir within the Federal Reserve. Barr announced in early January that after concluding that Trump would attempt to fire him, he would step down from his position as Vice Chairman for Bank Supervision. He would remain on the Board as an ordinary Governor.

Timiraos explained that as a law professor, Barr believes that sacrificing the Federal Reserve's reputation to keep his position is not worthwhile. If Trump simultaneously nominates a successor who is confirmed by the Senate while Barr questions his dismissal, the Federal Reserve's staff could find themselves responding to two different individuals claiming responsibility for bank supervision. Moreover, Barr may have to pay for any legal fees out of his own pocket.

Barr's self-demotion provided an opportunity for another Federal Reserve Governor to fill the position. Trump announced on social media on Monday that he plans to nominate Bowman for the position.

Bowman was appointed by Trump during his first term in 2018. After Trump's election in November last year, Bowman spoke to an audience limited to invited guests near Trump's home in West Palm Beach, Florida. Her speech praised her vote against the Federal Reserve's rate cut in September. Trump's advisors believe that the Federal Reserve should not cut rates before the election.

Another director appointed by Trump, Waller, has long been viewed as 'coveting' the position of chair by insiders at the Federal Reserve. Recently, he has sent more dovish signals about interest rate cuts compared to earlier last summer. In recent months, he believes the Federal Reserve should be prepared to continue cutting rates by ignoring any tariffs.

In December of last year, Waller used a Trump-like metaphor while describing the Federal Reserve's completion of challenges against inflation, which brought laughter from observers.

Waller stated, 'I feel like a mixed martial artist, constantly choking inflation and waiting for it to tap out. Surrender is inevitable. Inflation cannot escape the octagon.'

In an interview, Waller indicated that his views had not changed. As early as December 2023, he pointed to the prospect of significant rate cuts if inflation declines. He said, 'I said this long before the election. So, I don't think there is any political color to it. It's just what the data tells me to do.'

Some of his colleagues who strongly advocated for the Federal Reserve to cut rates early last year have also indicated that they should now refocus on inflation. Last fall, Federal Reserve Governor Kugler hinted at a hawkish turn by pointing out that the decline in immigration leading to labor growth could offset progress on inflation, which jeopardized the rationale for further rate cuts.

Chicago Fed President Goolsbee, another advocate for rate cuts last year, is now also cautious about inflation. In a speech in February, he emphasized the lessons from the COVID-19 pandemic and expressed skepticism about ignoring price increases related to tariffs. He said, 'Ignoring supply chain issues is dangerous.'

In an interview, Goolsbee stated that his fundamental view had not changed. He said, 'I have always said that if we can maintain a path of declining inflation, rates will be much lower than they are today in 12 to 18 months. I basically still believe this is correct. I am not hawkish.'

Timiraos pointed out that after the election, Powell asked his colleagues to tighten communication to avoid saying anything that could be perceived as unnecessary provocation to the new government. Biden-appointed Kugler spoke about the independence of the Federal Reserve a week after Trump's election.

Six years ago, during Trump's first term, he openly urged Powell to cut interest rates, but most of Trump's senior advisors did not intervene with the Federal Reserve. This time may be different. Advisors have hinted that they have a low opinion of the Federal Reserve under Powell's leadership.

Kevin Hassett, the director of Trump's Council of Economic Advisers, said in an interview last month: "The people leading the Federal Reserve… have made many mistakes on inflation over the past few years, initially saying it was all due to supply disruptions, etc., which allowed inflation to get out of control."

Although the government has stated that it is not trying to interfere with interest rate policy, Timiraos noted that the government has taken measures that could indirectly undermine the independence of the Federal Reserve or create new ways to challenge it.

An executive order from last month will give the government power to oversee the Federal Reserve's regulatory agenda and represent it in interpreting the law. Although the order exempts monetary policy, there remains ambiguity about how the order will be executed.

This confusion stems from a fundamental tension: If Federal Reserve governors cannot be removed for differing views on monetary policy, does that mean they can be fired for differing views on regulatory decisions? Powell has made very few public statements, merely noting that the Federal Reserve generally tries to align its policies with executive orders.

Trump's Justice Department has stated that it will seek to overturn a 1935 legal precedent that protects presidentially appointed regulatory officials from being dismissed due to policy disputes. For a long time, the court's rulings have been seen as a major safeguard for the independence of the Federal Reserve.

Waller stated: "The Supreme Court may say, 'No, you cannot dismiss members of these independent commissions.' Or they may say, 'Yes, you can.' Ultimately, if the Supreme Court makes this decision, that is the decision we have to accept."

Editor/rice