The role of the Federal Reserve is facing a redefinition.
Last week, the monetary policy meeting held by the Hoover Institution at Stanford University was themed 'Finishing the Job,' seemingly focusing on how the Federal Reserve can gradually lower interest rates while bringing inflation back to the 2% target. However, the signals conveyed during the meeting are intriguing; this 'task' may never truly be completed, and the Federal Reserve, as the executor, is also facing a redefinition of its role.
For the past 30 years, since Greenspan to Powell, the Federal Reserve has played the role of an 'active intervenor' in the market. From interest rate adjustments in the 1990s to the era of quantitative easing initiated after the 2008 financial crisis, and to the unprecedented asset purchases during the COVID-19 pandemic, the Federal Reserve has evolved from merely a monetary policy maker to a 'super central bank' for crisis response.
However, a consensus has quietly emerged during this meeting that this era is coming to an end. The future Federal Reserve may become more restrained and limited, even undergoing a fundamental change in its functions.
The current policy tools and theoretical framework of the Federal Reserve are facing increasing scrutiny. According to reports from Zhitong Finance APP, the Dean of Purdue University's Business School and former St. Louis Fed President Bullard pointed out that traditional 'price stickiness' models are no longer applicable. He believes that prices now adjust quickly, while the contract system has become more rigid; thus, the Federal Reserve's role should not be solely controlling inflation but also ensuring the predictability of currency to support the contractual system in economic running.
Harvard University professor and former chief economic advisor to the White House, Jason Furman, criticized the Federal Reserve for its 'chaotic framework,' and the frequently changing data indicators leave the market and the public at a loss. He called for the Federal Reserve to adopt clearer and more predictable rules instead of reacting to everything on the spot.
Cleveland Fed's new president, Harmack, suggested re-examining the role of the Federal Reserve's balance sheet, especially the long-term impacts of quantitative easing and tightening policies. Her predecessor, now a professor at Wharton Business School, Mester, believes the current policy decision memos are too brief, causing the market to overanalyze Chairman Powell's words, thereby affecting market stability.
Powell took office with the image of a pragmatic centrist but became a 'firefighter' due to the COVID-19 pandemic, at one point lowering interest rates to zero and initiating large-scale asset purchases to stabilize the market. Subsequently, facing high inflation, Powell quickly shifted direction, initiating the fastest rate-hiking cycle in decades.
Currently, the Federal Reserve has achieved initial results, with inflation easing. However, with Trump's return to the policy stage, his tariff measures and other policies may once again disrupt the price system. Stephen Brown from Capital Economics predicts that the USA's core CPI may rebound to 3.5% by the end of the year. Apollo's chief economist Torsten Slok further warns that the USA may face a "stagflation-like" situation of high prices and low growth, while the Federal Reserve is powerless to address it.
Powell is still striving for a "soft landing", but his term will end next May, and the market generally expects Trump to nominate a successor as early as this fall. At that time, this action may be taken over by someone else, and the outcome remains uncertain.
The outside world generally predicts that Powell's successor will be former Federal Reserve Governor Kevin Walsh, a person who has long criticized the Federal Reserve's crisis intervention model. Walsh advocates for the central bank to "step back", reduce the balance sheet, shrink its expanded responsibilities, and no longer excessively intervene in the market. He has publicly stated that "generalized objectives" such as climate change, wealth disparity, and financial stability should be removed from the Federal Reserve's task list, with the sole aim being to control inflation.
Another key figure is current Federal Reserve Governor Michelle Bowman, who is Trump's nominee for Vice Chairman of Supervision, and has a similarly lax regulatory stance. Their attendance at meetings alone signals an internal shift within the Federal Reserve.
The Federal Reserve is expected to announce the results of a new round of policy framework review this summer, but many insiders are skeptical, believing that the new framework is likely just a transitional document before leadership changes. Meester anticipates that the changes will be moderate, possibly including more symmetrical inflation target setting and clearer forecasting methods; while former Federal Reserve economist Andrew Levin warns that the internal checks and balances and transparency of the Federal Reserve are weakening, and reforms must be based on a clearer governance structure.
Under Walsh and his ideology, the Federal Reserve will be more restrained and focused, but it may also appear "under-armed" in the next financial crisis. Furman concludes: "We are in a completely new economic phase." Even without Trump's new round of tariffs, he doubts whether inflation can really decrease further.
