After months of avoiding conflict, Powell finally struck back, countering Trump's long-term political pressure!
After cleverly avoiding confrontation with U.S. President Trump for months, Federal Reserve Chair Powell is now striking back.
During the Q&A session on Wednesday local time, Powell portrayed the chaotic implementation of tariffs as an action clearly detrimental to the economy, criticizing the methods adopted by the Department of Efficiency, and legally defended himself regarding why he believed he could withstand any attempts by Trump to fire him.
As concerns about the Federal Reserve's independence continue to rise, Powell indicated that he would focus on the central bank's core objectives and strive to maintain them, which is a good thing for all of us.
Let us start with Powell defending the independence of the Federal Reserve.
Powell said at the Chicago Economic Club, 'Our independence is a legal issue,' as he explicitly countered a president who often tries to bully the central bank on social media and has begun to test the independence of other institutions.
Before making this statement, Chief Justice John Roberts allowed Trump to continue firing senior officials from other agencies—some believe this situation laid the groundwork for the more market-sensitive debate about whether Trump could fire or demote Powell. He said he did not think this case would apply to the Federal Reserve, and he would never bow to external forces.
Powell said, 'We will never be influenced by any political pressure. People can say what they want, and that's fine. That is not the issue. But we will act strictly according to our own will, without regard to politics or any other external factors.'
In a conversation with former Indian central bank governor Raghuram Rajan, Powell remained calm and did not name Trump in his criticism. However, his candor was clearly in stark contrast to the approach of this central bank governor, who basically avoided commenting on White House policies and turned a blind eye when Trump publicly attacked.
As Powell made these remarks, concerns about the independence of the Federal Reserve were beginning to subtly spread into market discussions.
Moreover, Trump's trade policies could potentially put the Federal Reserve in an impossible position—essentially trying to simultaneously control the risks associated with its stability of prices and labor market tasks.
Powell did not shy away from stating that the constantly changing tariff plans could push U.S. import tariffs to their highest point in a century—depending on which day of the week you decide to calculate these numbers. He said that if clarity does not return in the future, businesses and investors may withdraw their investments.
He said, 'If the U.S. becomes a jurisdiction with structurally higher risks in the future, it will reduce our attractiveness as a jurisdiction. We do not know yet, but I think that is the impact.'
He also expressed concern that cutting research funding could 'impact economic growth, productivity, health, and various other things.'
He was clearly aware of the constraints tariffs impose on the Federal Reserve. He said, '(The policies') impact is likely to lead us away from our goals. As economic growth slows, the unemployment rate is likely to rise, and with the imposition of tariffs and some tariffs being paid by the public, the inflation rate is likely to rise. Therefore, this possibility is significant.'
He stated that the Federal Reserve's 'obligation' is to maintain long-term price expectations. Economists tend to believe that inflation expectations are a self-fulfilling prophecy.
Powell also relaxed his usual commitment to avoiding comments on fiscal policy, making remarks equivalent to an outright criticism of the Department of Efficiency, which symbolizes Trump donor Elon Musk's iconic cost-cutting measures, which ultimately became a tool for cultural wars and resolving partisan discontent, rather than a tool for streamlining the budget.
As Powell correctly pointed out, Social Security, Medicare, and Medicaid occupy an overwhelming and growing share of the budget, and only through reforming welfare can any government make meaningful progress on spending.
Powell said, 'When people focus on cutting domestic spending, they are not actually addressing the problem. Discretionary domestic spending (as a percentage of federal spending) has been declining. I like to point this out because much of the dialogue provided by politicians is about discretionary domestic spending, which is not where the problem lies.'
Ultimately, I believe that Powell's boldness will prove to be an asset for the economy and markets in a time of significant decision-making turmoil.
On Wednesday, Powell's remarks seemed to deepen the decline in the S&P 500, with some traders focusing on his cautious stance regarding interest rate cuts to address the tightening financial environment, which is somewhat difficult to understand.
In the medium term, investors need to know that the U.S. central bank remains committed to achieving maximum employment and price stability, even if it needs to fight for its ability to do so. So far, market volatility does not belong to either of these scenarios.
