Trump Lashes Out at Powell: Is Rate Cutting a Market Rescue or Pouring Fuel on the Fire?

Huìtōng Financial APP News — Faced with economic pressures and inflation concerns, Trump has repeatedly called for the Federal Reserve to cut interest rates.

The former president, who once nominated Jerome Powell to be Fed Chair, has recently criticized Powell on social media for being “too slow to respond,” urging an immediate reduction of interest rates to 1%, viewing rate cuts as a key tool to stimulate the economy and lower living costs.

On the 12th, Trump stated that Powell should not wait until the next Fed meeting to cut rates; he should lower them immediately.

Powell actually feels quite aggrieved, because on January 28th, under pressure from the White House and data, Powell and his colleagues maintained the benchmark interest rate unchanged at the policy meeting. Now, facing rising global inflation driven by war, it feels like they have perfectly answered the exam questions—yet instead of praise, they are under further pressure.

In the process of Trump emphasizing rate cuts to the Fed, some important issues seem to have been overlooked: the monetary policy during wartime is fundamentally different from that during peace. Rate cuts in peacetime are about “empowering growth,” whereas blindly cutting rates during war only adds fuel to the fire.

On one hand, Fed rate adjustments are usually implemented only at scheduled meetings. Emergency rate cuts are only appropriate during extreme crises like COVID-19. The Iran-U.S. conflict has caused inflation to rebound rather than liquidity shortages, so it does not meet the conditions for emergency easing.

On the other hand, the core PCE inflation rate has risen to 3.1%, diverging from the 2% policy target. Rising oil prices continue to transmit inflationary pressures. Cutting rates now would undermine market confidence in the Fed’s anti-inflation efforts.

Markets have already spoken with their feet. According to CME FedWatch, after the conflict erupted, traders abandoned expectations of rate cuts in early summer and even ruled out a September cut, only pricing in a single rate cut in December. The next additional rate cut has been pushed back to the second half of 2027. This shift in expectations directly responds to Trump’s misperceptions.

The Rational Choice of the Fed: Keep Rates Steady and Anchor Anti-Inflation Goals

Under the dual constraints of war and inflation, the Fed’s policy path has become clearer.

At the upcoming FOMC meeting on March 18, the market assigns nearly a 100% probability that the current interest rate range of 3.50%-3.75% will be maintained. This decision is based on multiple practical considerations.

First, inflationary pressures continue to ferment, with soaring oil prices and high core PCE inflation making anti-inflation the top priority. Goldman Sachs has delayed its next rate cut expectation from June to September.

Second, increased economic uncertainty caused by the conflict requires the Fed to retain policy flexibility and avoid premature easing that could lead to stagflation. Lastly, with a new dovish chair set to take office in May, maintaining current policies helps ensure a smooth transition and avoid market volatility.

The Fed’s cautious stance is essentially a rational adaptation to the wartime environment. As US economist Stephen Juno said, “Inflation remains in a range above the target, and the Fed should not rush to further loosen rates.”

Even if signs of labor market cooling appear, rising oil prices and their impact on inflation expectations make policymakers hesitant to act lightly.

For markets, the Fed’s “wait-and-see” approach is not passive waiting but anchoring policy amid chaos, avoiding negative resonance between monetary policy, fiscal deficits, and geopolitical risks.

Traditional monetary transmission mechanisms can fail entirely under the shadow of war.

In peacetime, rate cuts release liquidity, lower financing costs, and stimulate corporate investment and consumer spending, forming a closed loop of economic growth. But geopolitical turmoil caused by US-Iran conflict has completely broken this chain.

Risks in the Strait of Hormuz have pushed up crude oil premiums, with prices surpassing $100 per barrel. Supply chain restructuring has reduced economic efficiency, increased military spending creating rigid deficits, and the resulting triple pressures have led to a strange “liquidity stagnation” pattern—new funds refuse to flow into war-affected industries, instead flooding into safe-haven assets like oil and gold, which neither generate GDP nor reduce corporate costs, exacerbating stagflation risks.

More critically, war has broken the link between monetary policy and economic growth.

According to fiscal theory of the price level (FTPL), fiscal surpluses depend on economic growth, but increased non-productive government spending and inflationary chaos caused by war make fiscal consolidation difficult, forcing governments to run high deficits.

At this point, central banks face a dilemma: tightening monetary policy to fight inflation could suppress growth and increase debt repayment burdens; loosening policy might channel liquidity into speculation, conflicting with economic stimulation goals.

The core issue with policy failure is that the uncertainties created by war far exceed what monetary policy can manage—without ending the conflict, any rate adjustments are merely “treating the symptoms, not the cause.”

Gold: The Ultimate Safe-Haven Asset in the War and Policy Game

Next Thursday (March 19) at 2:00 AM, the Fed will announce its interest rate decision, with markets expecting no change in the benchmark rate.

In this battle between war and monetary policy, gold’s safe-haven qualities are being continuously reinforced, becoming a “barometer” amid market volatility.

Data shows that recent London gold prices have fluctuated around $5,100 per ounce, repeatedly rising above $5,200 during periods of conflict escalation.

This performance essentially reflects a dual hedge by funds against war uncertainty and policy failure—when the Fed cannot resolve “liquidity stagnation” and “real money shortages” through rate adjustments, and when rate cut calls clash sharply with anti-inflation goals, gold, as a hard asset that does not rely on credit issuance or policy intervention, naturally becomes a “safe harbor.”

The current temporary underperformance of gold is mainly due to its previous large gains and the globally high yields on government bonds, making gold less attractive compared to high-yield, liquid bonds. Additionally, inflation is mainly driven by rising upstream material costs rather than excessive monetary issuance.

However, as the conflict prolongs and concerns over oil prices diminish, the risk premium for gold as a safe haven will increase.

For investors, gold is no longer just a short-term speculative tool but a long-term hedge against war risks, policy failure, and inflation rebound. Its price movements will continue to reflect the ongoing geopolitical and Fed policy battles.

(Spot gold daily chart, source: Yihuitong)

(Editors: Wang Zhiqiang HF013)