In a widely anticipated speech at the annual central bank conference in Jackson Hole on Aug 23, Federal Reserve Chairman Jerome Powell discussed the Fed's independence and gave clues to its next move.

Powell made it clear that, if trade tensions worsen the economic outlook, the Fed "will act as appropriate to sustain the expansion", possibly with more interest cuts. However, how to proceed remains to be seen, as the US leader has frequently berated the Fed's policies and its chairman.

To achieve its mission of boosting employment and maintaining stable prices, the Fed always regards its independence as being critical for the economy.

However, the US president has made it clear in various interviews and tweets that he doesn't believe that the Fed should be independent. He has frequently questioned or disparaged the judgment and interest rate policy of Fed.

After recent stock market falls, the US leader has unyieldingly criticized Powell as being "clueless" and having a "horrendous lack of vision". On Aug 23, he intensified his Twitter assault on the Fed, claiming the Fed chief was an enemy of the state.

The US leader has frequently heaped scorn on the Fed and Powell, and has called for lower interest rates for over a year.

On Aug 19, the US leader called for the Fed to sharply cut its benchmark interest rate by at least a full percentage point and launched a new bond-buying program to lower long-term borrowing costs. Such moves are typically only considered when the economy is in serious peril.

He seems intent on saddling the Fed with the blame if the US economy does slide into recession.

Under the pressure of Trump, on July 31, the Fed announced the US' first interest-rate cut in over a decade, by a quarter percentage point to a range between 2 percent and 2.25 percent, to protect against "downside risks". The Fed was said to be worried about weaker global growth, trade tensions and a vicious cycle so-called "Japanification" where low inflation is entrenched due to muted inflation expectation below its target of 2 percent.

The move was not universally understood or countenanced as the US economy still seems buoyant with its longest expansion on record.

On Aug 1, the US Treasury officially labeled China a currency manipulator, a step that hasn't been taken in 25 years. This move was triggered by the renminbi sliding to more than 7 to the dollar in both the offshore and onshore markets, which was prompted by the announcement of new tariffs on Chinese imports of $300 billion. After an investigation, the International Monetary Fund denied the US allegation, crediting China with greater exchange rate flexibility.

In fact, China doesn't have any incentive to weaken its currency in a world of global financial flows, as a depreciation of the renminbi could strain its balance sheet and the ability of domestic borrowers to service foreign-denominated debts and possibly trigger a debt crisis.

On Aug 23, Powell signaled that, if trade tensions worsen the economic outlook, the Fed would follow its rate cut last month with an additional reduction soon, although he didn't specify how much stimulus the Fed might provide beyond that.

Powell also admitted that the Fed's tools are not well-suited to counter the rising anxieties and damage when it comes to trade. He said he was increasingly worried about the limits to what the Fed can accomplish, partly because, with rates already low the Fed has less room to cut rates to spur growth.

"While monetary policy is a powerful tool that works to support consumer spending, business investment and public confidence, it cannot provide a settled rule book for international trade," he said.

Powell is fighting to allay recession fears and buoy the economy while striving to preserve the Fed's independence in the face of unprecedented political interference and market scrutiny.

The US leader has contemplated replacing Powell as the Fed chairman for the sin of not doing what he wanted. His frustration with the Fed has led him to name a number of partisan loyalists, and central bank critics, to the Fed's board.

The unprecedented attack by the US leader on the Fed's chairman and the Fed's independence over the past year prompted four past Fed chairmen to recently co-write a joint op-ed to remind the country that possible damage short-term political pressures could undermine the proper long-term objectives of monetary policy.

The US administration appears to have inadvertently and counter-productively entered a policy culde-sac on trade, where its trade policy is challenging the Fed's monetary policy. The uncertainty created by these trade policies has posed continuous challenges to the stewards of US monetary policy.

The Fed's rate cuts tend to reduce the cost of short-term borrowing, scale up investment domestically, weaken the dollar to reduce the US trade deficits and help revive expectations for growth and inflation. However, rising tariffs fuel uncertainty that triggers market jitters, causes a steeper falloff in business activity, and create headwinds for US exports.

The intervention in the Fed's decision-making has left the Fed short of ammunition for later use and led to increased financial volatility and asset-price excesses.

It will undermine one of US key assets, its open capital markets. Foreign investors will think twice about betting on dollar assets if Washington reserves the right to bet against them whenever it sees fit.

The US' July employment report illustrates a-half-century-low unemployment and steady hiring and wage gains. The inflation was 1.5 percent in May, remaining stuck below the Fed's 2 percent target. Prematurely providing stimulus to an economy that continues to see steady hiring and consumer spending risks fueling financial bubbles and other troubles.

The author is a senior fellow at the International Cooperation Center of the National Development and Reform Commission of China.

The author contributed this article to China Watch exclusively. The views expressed do not necessarily reflect those of China Watch.

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