On the eve of the Fed's interest rate resolution, Nick Timilaus, a macro journalist known as the "Federal Mouth Bottle", issued a statement bluntly saying that the Fed will not "give up its efforts to fight inflation too early" . At the same time, it pointed out that under the impact of tariff policies, whether interest rate cuts or not, the Fed will eventually fall into trouble: either face an economic recession or wait to manage more troublesome stagflation .

Obviously, his speech at this point in time is not only to export policy expectations to the market, but also to "give Trump a vaccination."

As a background, the Federal Reserve will hold a interest rate meeting starting Tuesday and announce the results at 2 a.m. Beijing time on Thursday. Since the market generally expects that the rate cut node will be at least after June, the focus this week is how Powell communicates policy amid the background of Trump's repeated statements to demand rate cuts.

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(Market pricing predicts that there will be no interest rate cut this week, source: CME FedWatch)

There will be no "preventive rate cut"

Timmilous said Fed Chairman Powell and his colleagues are on the track to extend the wait-and-see rate cut stance and are developing strategies to refine this position. This "well-calculated patience" reflects officials' determination to avoid giving up on fighting inflation too early.

For Fed officials, the current situation can be summarized as a "two-choice-one" dilemma: if you choose to maintain the existing policy interest rates to continuously suppress inflation, it may lead to a more serious recession in the US economy; but the early cut of interest rates slows down the impact of tariffs on the economy may intensify the short-term inflationary pressure brought by tariffs and supply shortages.

Powell lamented last month that it is undoubtedly very difficult to make a judgment.

"It's not a cycle of preemptive interest rate cuts by forecasting a slowdown," said Richard Clarida, a senior adviser to U.S. asset management giant Pimco (Pacific Investment Management) and a three-year deputy to Powell. " They need to see signs of a slowdown in specific data, especially labor market data. "

Another former Fed official who has worked with Powell for a long time also said Powell's policy style is not the "preemptive" type.

" The Fed, led by Powell, has been acting in a style that has been waiting for the data to be fully clear before moving quickly. It is foreseeable that if the labor market deteriorates significantly, the Fed will be ready to take action."

Timmylaus said that sometimes the Fed will set interest rates because of its pursuit of the best economic outcomes, such as a series of interest rate cuts after inflation fell last year; and at other times, the Fed's policies are just to weaken the impact of "bad results", such as aggressive rate hikes from 2022-2023. Tariffs may force them to take the latter approach , at least first ensuring that one-time price increases after the tariffs are implemented will not trigger more lasting inflation.

Powell is expected to speak "eagle language"

Since interest rate policy itself has no suspense, the market rise and fall on Wednesday will depend entirely on what Powell said.

From the perspective of monetary policymakers, Powell's dovish remarks that tend to cut interest rates may not help prevent rising costs or slowdowns caused by tariffs. If you act more "hawkish", it may instead suppress the market's inflation expectations.

"Even if I'm thinking about finding ways to cut interest rates, I'll make hawkish comments because I want to anchor inflation expectations," said former Dallas Fed Chairman Robert Kaplan.

Timmylaus pointed out that now Fed officials agree that a rate cut is inappropriate until they see specific signs of slowing consumer spending and rising unemployment.

In fact, among all the current FOMC members, only director Christopher Waller has so far made a public statement calling on the Federal Reserve's policies to actively turn to support economic growth. He recently said that after the leadership of this Federal Reserve misjudged the economic situation four years ago and maintained zero interest rates for too long to detonate inflation, it now needs some courage to change policy ideas.

The Fed's broader concerns can be summarized into two points: one is worrying that higher inflation expectations will significantly increase the difficulty of suppressing inflation; the other is worrying that supply chain disruptions may cause price pressure to exceed the scope of pure tariff transmission.

" I would rather act slow but in the right direction than act fast but in the opposite direction ," Cleveland Fed Chairman Hamak said in a speech last month.

Former Boston Fed Chairman Rosengren also pointed out that under the environment of rising tariffs and supply shortages, cost is likely to rise, lowering interest rates may initially intensify cost pressure and will not alleviate economic pressure.

Rosengren also expected that it could be easily imagined that the Fed would remain silent in the next two to three meetings, and that interest rate cuts would be more meaningful when the economy deteriorates more significantly. He also stressed that low interest rates have limited effects on supply chain issues, but as demand begins to weaken, the Fed may need to take a larger 50 basis point rate cut.

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