The Fed and the fateful week

(Dan Tri) - 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 at the meeting table.

The Economic Dilemma: Mild Stagflation

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

The reality, however, is much more complicated. The US economy is facing a dilemma that economists describe as “stagflation mild” – a nightmare scenario for any central bank. Stagflation is the concept of an economy facing three main factors at the same time: high inflation, slow or no economic growth (stagflation), and high unemployment.

On the one hand, there are clear signs that the labor market, which has been a strong pillar of the US economy, is starting to cool. This creates pressure on the Fed to act, namely to cut interest rates to stimulate economic activity and prevent the risk of recession, protecting jobs for people.

Inflation, on the other hand, remains stubbornly high, hovering above the Fed’s 2% target. Part of the reason comes from the Trump administration’s tariff hikes, which have both slowed growth and pushed up commodity prices.

This is the perfect economic trap. The only tool the Fed has to support the labor market, which is to lower interest rates, risks adding fuel to the inflationary fire.

Powell is walking a fine line: Loosen too much and inflation will explode. Tighten too soon and the economy could fall into recession. The widely expected 0.25 percentage point cut is seen as a middle step, an attempt to appease both sides without completely pleasing either.

The Fed's interest rate policy committee meets on Tuesday and Wednesday, with a decision due at 2 p.m. ET Wednesday. The decision will shape not only the economy but also the future of the Fed itself (Photo: Reuters).

Internal discord reaches historic levels

If the economic math is daunting enough, the situation inside the Federal Open Market Committee (FOMC) is even more tense. The Fed is deeply divided on the way forward, and this week's meeting could see a historic level of public dissent.

One group, known as the "hawks," is concerned about the risk of inflation remaining high. They believe that cutting interest rates now is too early and could cause inflation to spiral out of control. They want to keep interest rates unchanged to ensure price stability.

The doves, on the other hand, focus on signs of weakness in the labor market. For them, the risk of recession and job losses is a bigger threat. They favor more aggressive interest rate cuts to prevent an economic collapse.

The polarization was so intense that Matt Luzzetti, chief economist at Deutsche Bank, said: "This may be the first meeting since 1988 where three governors voted against, and it may also be the first time since September 2019 that there was opposition from both sides."

A split vote (some calling for a deeper cut and some holding steady) would be a highly unusual sign of disunity and confusion within the policymaking body, making it nearly impossible for Chairman Powell to deliver a clear and consistent message to markets.

Fed's independence is under unprecedented test

As if internal strife and economic problems weren't enough, the Fed is also facing a direct and systematic attack from the executive branch, putting 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, accusing her of lying about mortgage records before joining the Fed. This is an unprecedented move that challenges the core principle that Fed governors are protected from political interference so they can make decisions based purely on economic data. The case is pending before an appeals court, and a decision could come just before the meeting, creating a cloud of uncertainty.

Second, in parallel with removing a governor, the White House is using a fast-track process to have the Senate confirm Stephen Miran, currently chairman of Mr. Trump’s Council of Economic Advisers and one of the Fed’s most vocal critics, to fill the vacant seat on the Board of Governors. If approved in time for Monday, Miran could be sworn in and join the policy meeting on September 16.

Derek Tang of LH Meyer warns of long-term consequences: "Increasingly, people will tend to view Fed governors through the political prism of who appointed them rather than seeing them as objective decision makers. And that will become harder to avoid."

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

Powell's performance

Amid the economic and political turmoil, all eyes will be on Chairman Jerome Powell in his press conference after the rate decision is announced. How he navigates the meeting, answers questions and delivers his message will provide clues to the Fed's direction in the coming months.

Experts are also divided on Powell's strategy:

Cautious scenario: Antulio Bomfim, a former adviser to Powell, believes the Fed chairman will be cautious. He will likely try to quell market expectations for another cut in October, stressing that inflation risks remain high and the labor market has not collapsed to the point where urgent action is needed.

Under this scenario, the next cut could have to wait until December. Bomfim also believes that external political pressure could inadvertently make Fed members more united to protect the institution.

Proactive scenario: In contrast, Matt Luzzetti of Deutsche Bank predicts Powell will signal three rate cuts this year (September, October and December) to preempt and prevent a more pronounced labor market deterioration. This is an “insurance” strategy to ensure the economy continues to grow.

Vincent Reinhart, a former Fed official, offers an interesting perspective: Powell may choose to play it safe with a small cut, while allowing dissenting members to express their views via a “dot plot” – where each official anonymously projects the path of future interest rates. This is a way to maintain the appearance of unity in the joint decision while still acknowledging the underlying divisions.

The Federal Reserve's upcoming week will go down in history, but probably not for its decision to cut 0.25 percentage points because the market expected it.

It is a test of Jerome Powell's leadership, of the resilience of an independent institution under attack, and of the ability of the world's most powerful central bank 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