Competing Economic Forces
Jerome Powell is almost done. With just two FOMC meetings left as Fed Chair, he faces perhaps the most politically charged economic environment in decades. Here's what you need to know going in.
Key Developments
- US prosecutors investigated Powell in an attempt to pressure him to lower interest rates
- Gold and precious metals have surged almost vertically
- The US dollar is weakening against the Swiss franc, risking higher inflation
- Consumer confidence has hit lows not seen since before COVID—actually lower than the depths of the pandemic
The K-Shaped Economy
When you plot consumer confidence against stock market performance, you see a literal K-shape. 90% of stocks are owned by the top 10% of people.
"Consumer confidence is collapsing while stock market rises. The people that own the stocks are feeling quite good. People that don't are feeling more and more desperate."
This divergence explains so much of our current political moment. The economy is "doing great" by traditional metrics while most people feel squeezed.
The Fed's Challenge
The Federal Reserve has a dual mandate: maximum employment and stable prices. Right now, both sides are flashing warning signs.
This creates a painful dilemma: How did we end up with high inflation AND weak jobs at the same time? Normally the Fed can address one or the other—but 2026's unique combination of tariffs, immigration restrictions, and energy bottlenecks has broken the usual playbook.
| If Powell... | It signals... | The risk is... |
|---|---|---|
| Raises rates | Inflation is the bigger threat | Job losses, recession |
| Lowers rates | Jobs are the bigger threat | Inflation, looking like he's giving in to Trump |
| Holds steady | "We're scared in both directions" | Uncertainty continues |
US long-term unemployment is at a 4-year high. People are reporting it takes increasingly longer to find a job, especially one that fits their qualifications. Meanwhile, inflation remains "somewhat elevated."
Hold Steady
Powell chose option three: do nothing. No raise, no cut. A wait-and-see approach.
"We see the current stance of monetary policy as appropriate to promote progress toward both our maximum employment and 2% inflation goals."
Translation: "We're scared to death in both directions. Jobs are not looking good. Inflation's not looking good. We have to wait and see."
Who's Next?
There's been a celebrity apprentice-style hunt for the next Fed Chair. Trump faces a dilemma: he wants someone who will do exactly what he says, but they also need to be trusted by markets.
"Everyone that I interviewed is great... problem is they change once they get the job. They go in saying everything I want to hear and then they get the job, they're locked in for six years, and all of a sudden, let's raise rates a little bit." — Donald Trump
The current frontrunner is Rick Rieder of BlackRock—which is optically problematic given BlackRock's unpopularity across the political spectrum. Interestingly, Rieder has donated to Jeb Bush, Pete Buttigieg, and Nikki Haley—all Trump opponents.
Key Q&A Moments
On Fed Independence
When asked what would happen if the Fed loses independence, Powell gave perhaps his most important answer:
"Every advanced economy democracy in the world has come around to this common practice... to not have direct elected official control over the setting of monetary policy. The reason is that monetary policy can be used through an election cycle to affect the economy in a way that will be politically worthwhile."
On the US Fiscal Situation
When asked if the US could end up like Japan (where bond markets are in turmoil), Powell was surprisingly direct:
"The US federal budget deficit is, you know, uncontroversially on an unsustainable path. The level of debt is not unsustainable. It's very much sustainable, but the path is unsustainable. And the sooner we work on it, the better."
He noted a critical problem: "We're running a very large deficit at essentially full employment"—something that violates basic fiscal principles.
On Whether He'll Stay as Governor
Powell's term as Chair ends in May, but he could legally stay on as one of the 12 voting governors. When asked, he gave nothing: "I have nothing for you on that today."
If he stays, he could become a "shadow Fed chair"—someone whose opinion carries so much weight he effectively still leads the institution.
On GDP vs. Labor Market Data
When asked about the disconnect between strong GDP and weak job markets, Powell dropped some real wisdom:
"The lore is that when GDP and the labor market get into an argument, in the end, labor market data is more reliable. GDP data is very hard to collect and understand."
This is important: GDP often gets revised dramatically downward, while labor market data reflects real human experiences.
On Cutting Rates Without Spurring Inflation
A reporter challenged Powell: Given fiscal tailwinds like big tax refunds and strong growth, how could you cut rates without causing inflation?
Powell's cryptic response: "It would depend on how fast potential output is growing." Translation: If AI and productivity gains are expanding what the economy can produce, maybe rate cuts wouldn't be inflationary. But he's not betting on it.
Understanding the Mechanics
The Fed's decisions ripple through every corner of the economy. Here's how the key mechanisms actually work:
Interest Rates & Government Debt
Does the Fed's interest rate decide how much interest the US pays on its deficit? It's complicated—about 1/3 of US debt is short-term and tracks the Fed rate closely, while long-term debt is more influenced by market expectations.
This raises a question: why wouldn't the Treasury make all debt short-term to get lower rates?
Corporate Borrowing
Companies like NVIDIA can borrow at rates only slightly above Treasuries. But why would they issue bonds instead of just taking bank loans?
Zombie Companies & BNPL
When rates are too low for too long, zombie companies survive that should die, blocking resources from productive uses. Are any BNPL companies actually healthy today?
The Inverted Yield Curve
Right now, short-term rates are higher than long-term—an unusual situation called an inverted yield curve. Shouldn't this kill demand for long-term bonds?
Can the Fed Go Bust?
The Fed acts as lender of last resort when credit markets freeze. But could the central bank itself go bust?
What Does This Mean For You?
The Fed held rates steady, which means:
Short-term impacts
- Mortgage rates stay elevated (~6%)
- Savings accounts continue earning decent interest
- Credit card rates remain painful
- Business borrowing costs unchanged
The bigger story is the political pressure on Fed independence. Every advanced democracy keeps its central bank independent from politicians because politicians will always want to lower rates to boost their popularity—even when it's economically destructive.
With midterms approaching and Trump wanting rate cuts "to the bone," the next Fed Chair pick will be one of the most consequential appointments of this administration.
The bottom line: We're in a K-shaped economy where the metrics say things are fine but most people are struggling. The Fed is stuck between inflation and employment concerns. And the independence that has protected American monetary policy for decades is under unprecedented pressure.