In the grand chess game of the global financial market, the Federal Reserve has always played a crucial central role, with every move akin to a boulder thrown into a calm lake, stirring up waves that profoundly influence the trajectory of the world economy. However, the current Federal Reserve seems to be standing at a crossroads in the midst of a storm, facing numerous thorny problems, raising the question: Is the Federal Reserve going to kneel?
Internal Struggle: A Torn Decision-Making Camp
On July 30, 2025, the results of the Federal Open Market Committee (FOMC) meeting were like a shockwave in the financial market. In this meeting, the Federal Reserve maintained the federal funds target rate at 4.25% - 4.50% for the fifth consecutive time, a decision that may not have surprised many. However, what was shocking was the rare internal divisions that emerged during the meeting, with two board members appointed by Trump—Waller and Bowman—openly voting against maintaining the interest rate and advocating for an immediate cut of 25 basis points. This situation had not occurred since 1993, highlighting a significant rift within the Federal Reserve regarding the assessment of the economic outlook, like a chasm separating the decision-making body.
The dovish camp, represented by figures like Waller and Bowman, believes that the current high interest rates have severely suppressed employment and economic growth. The performance of US economic data seems to lend credence to their viewpoint, as in July, the US added only 73,000 non-farm jobs, far below Bloomberg's consensus estimate of 104,000, and the data for May and June was cumulatively revised down by 258,000, the largest downward revision since May 2020. The noticeable cooling of the job market has strengthened the dovish belief that rate cuts are imminent, asserting that only by lowering interest rates can economic recovery be stimulated and job opportunities increased.
The hawks, however, stand their ground, primarily concerned that the tariff policies implemented by the Trump administration could trigger uncontrollable inflation. From the data, the impacts of tariffs have already become evident in certain areas. Powell pointed out at a news conference that the core personal consumption expenditures (PCE) price index may have risen by 2.7% year-on-year in June, with 30% - 40% of the core inflation pressure coming from tariffs. Energy prices have also surged by 8.7% month-on-month due to conflicts in the Middle East, further exacerbating inflation concerns. The hawks fear that if interest rates are easily cut, it may reignite inflation that has just begun to be somewhat controlled.
This intense internal struggle has led the Federal Reserve's decision-making to a stalemate, making it difficult to find a balanced pivot point for policy, and every decision has become a daunting challenge.
Political Pressure: Struggles Under the Shadow of the White House
Trump's pressure on the Federal Reserve is relentless, like a surging tide, wave after wave. He has repeatedly publicly criticized the Federal Reserve, vehemently accusing it of 'hurting the people', even demanding that the Federal Reserve 'immediately cut rates by 250 basis points'. This almost insane demand shows Trump's extreme dissatisfaction with the Federal Reserve's monetary policy. He has even personally gone to the Federal Reserve headquarters to exert pressure, an act of direct presidential intervention in Federal Reserve decision-making that is extremely rare in history and has severely impacted the independence principle that the Federal Reserve has long upheld.
From a political standpoint, Trump's pressure has clear vested interests. The enormous scale of the US government's debt makes interest payments a heavy burden; for each percentage point reduction in interest rates, $360 billion in interest expenses can be saved. In Trump's eyes, lowering interest rates seems to be a cure for easing fiscal pressure, stimulating economic growth, and boosting his political support.
Although legally Powell's term lasts until May 2026, the likelihood of Trump directly firing Powell is low. However, Trump has started to manipulate personnel arrangements, actively scouting 3 to 4 candidates, including Waller, who has shifted to a more dovish stance, attempting to seize control of the Federal Reserve after Powell's term ends in 2026 with individuals more aligned with his economic policy ideas. This personnel maneuvering undoubtedly casts a thick political shadow over the future decisions of the Federal Reserve.
Under this political pressure, the independence of the Federal Reserve faces unprecedented challenges. Its decision-making is no longer based solely on economic data and professional judgment but must also consider the political winds from the White House, akin to dancing on a tightrope, where a small misstep could lead to imbalance and collapse.
Economic Dilemma: Confusion Under Stagflation
The US economy is now deeply mired in difficulties, with the shadow of 'stagflation' hanging over the entire economic system. From the perspective of inflation, although the inflation rate has retreated from its peak in mid-2022, it still exceeds the Federal Reserve's long-term target of 2%. The core PCE price has risen by 2.7% over the past 12 months ending in June, with tariffs driving up the prices of certain goods, and due to the imposition of tariffs, some indicators measuring inflation expectations have recently risen. Although long-term inflation expectations currently align with the 2% target, the impact of tariffs on inflation continues to brew, and the future trend is fraught with uncertainty.
In terms of economic growth, the GDP growth rate of the United States in the first half of 2025 was only 1.2%, significantly lower than last year's 2.5%, indicating a clear downward trend in economic growth. Consumer spending, as an important engine of economic growth, is also showing signs of slowing down. Meanwhile, the unemployment rate has begun to rise, with July non-farm data showing that job losses in the construction sector hit a new high since the pandemic, and truck driver wages fell month-on-month, pushing the unemployment rate up to 4.1%. This coexistence of slowing economic growth and high inflation is a typical characteristic of stagflation, placing the Federal Reserve in a dilemma of policy challenges.
If the Federal Reserve cuts rates to stimulate economic growth, it may further push up inflation, making already out-of-control prices even harder to manage; while if it maintains high rates to curb inflation, economic growth may be further hindered, sinking deeper into recession. The Federal Reserve is like a traveler groping in the dark, struggling to find a clear direction in the face of a complex economic situation.
Global Shock: A Single Thread Affects the Whole Body
As the core engine of the global economy, the direction of the Federal Reserve's policies has a profound impact on the global economy and financial markets. When the Federal Reserve finds itself in trouble, the global market also struggles to remain unscathed.
Emerging market countries are the first to bear the brunt, facing enormous impacts. The dollar, as the world's primary reserve currency, has its interest rate and exchange rate fluctuations crucial to the capital flow and economic stability of emerging markets. With the strengthening of the dollar, emerging market countries are under severe pressure of capital outflows. For example, countries like Egypt and Pakistan have foreign exchange reserves that can barely cover 1.2 months of imports, while Argentina has even been forced to implement mandatory export currency settlement policies to cope with tight financial conditions. The currencies of emerging market countries are depreciating, facing severe challenges to economic growth.
For China, the Federal Reserve's predicament has also brought many constraints. The widening interest rate differential between China and the US has hampered the Chinese central bank's ability to adjust monetary policy. To avoid excessive capital outflows and a significant devaluation of the yuan, the People's Bank of China finds it challenging to follow the Federal Reserve in cutting rates, which to some extent limits the stimulative effect of China's monetary policy on the domestic economy. Meanwhile, the pressure on the yuan to devalue has increased, and the risk of imported inflation has risen, presenting new challenges to the stable operation of China's economy.
Ripples are spreading through every corner of the global financial market due to the Federal Reserve's predicament. Asset prices such as international gold prices, the dollar index, US Treasury yields, and US stocks have experienced severe fluctuations. After the Federal Reserve's meeting on July 30, international gold prices fell to $3,327 per ounce, the dollar index rose to 99.82, the yield on 10-year US Treasuries rose to 4.37%, the yield on 2-year US Treasuries surged to 3.93%, and US stocks showed mixed results. This significant market volatility reflects increased investor worries and uncertainties about the global economic outlook.
Future Outlook: Difficult Choices in the Fog
Looking ahead, the policy path of the Federal Reserve is filled with uncertainty, akin to a giant ship sailing through fog, struggling to find a clear direction. Although market expectations for Federal Reserve rate cuts are constantly changing, it appears that the possibility of a September rate cut still exists, but it is not set in stone.
If economic data continues to weaken, such as if the unemployment rate exceeds 4.5%, and PCE inflation significantly declines, while tariffs do not trigger sustained inflation, then the Federal Reserve may begin a rate-cutting cycle in September. However, if inflationary pressures remain high or if the economy experiences an unexpected rebound, the Federal Reserve may continue to maintain interest rates or even adopt a more hawkish policy.
From a long-term perspective, the future of the Federal Reserve depends not only on economic data and policy decisions but also on political factors and changes in the global economic landscape. If the Trump administration continues to pressure the Federal Reserve or if global trade frictions escalate, the Fed's independence and decision-making space will face greater restrictions.
The Federal Reserve is indeed facing numerous severe challenges, including internal power struggles, political pressure, economic difficulties, and global shocks. Each issue acts like a heavy shackle that binds the actions of the Federal Reserve. But to say that the Federal Reserve 'is going to kneel' may be premature. The Federal Reserve possesses a wealth of policy tools and an experienced decision-making team, and in the coming days, they will navigate through dense fog, striving to find a path that balances economic growth, controls inflation, and maintains financial stability. However, this path is bound to be fraught with thorns, and the global economy will continue to experience the trials of storms under the influence of the Federal Reserve's decisions.
