The Trump administration's decision to temporarily suspend some tariffs is like pressing the pause button in a storm, but it has not changed the course of the Federal Reserve's giant ship. In the midst of conflicting trade policy fog and economic data signals, Federal Reserve officials have chosen to stick to a wait-and-see position and anchor interest rates at current levels. Behind this policy deadlock is a rare dilemma where the specter of inflation and the risk of economic slowdown are emerging simultaneously, and monetary policy makers are facing one of the most complex decision-making environments in decades.

Policy dilemma: walking on the tightrope between inflation and growth

Federal Reserve officials have been speaking out intensively recently, expressing deep concerns about the economic outlook. Kansas City Fed President Schmid's statement is quite representative: "We are standing at a watershed in monetary policy, with both upward risks of inflation and downward risks of growth intensifying." This dual pressure puts the traditional policy path in a dilemma - according to the conventional script, rising inflation requires rate hikes to curb, while economic slowdown requires rate cuts to stimulate. Dallas Fed President Logan pointed out in his speech at the Peterson Institute that tariffs could lead to a resurgence of the most difficult combination of monetary policy, namely "stagflation".

Market Pulse: Hidden Cracks in the Financial System

Although the Federal Reserve emphasizes that the market is operating normally, the undercurrents beneath the surface have begun to surge. The bond market is sending unsettling signals: the 10-year US Treasury yield continues to rise, reflecting investors' adjustment of long-term inflation expectations; The corporate bond market has shown significant differentiation, with investment grade bond issuance in a semi frozen state. Chicago Fed President Goolsby observed that "the tightening of credit conditions is faster than expected, which may overdraw economic growth momentum ahead of schedule." It is particularly alarming that the risk premium of BBB rated corporate bonds is quietly expanding, and this bond category, once known as the "falling angel," is often a precursor indicator of economic turning points.

Decision dilemma: Unknown waters without navigation map

We are writing a new chapter in monetary policy, "said a Federal Reserve official who declined to be named privately. Traditional economic models are inadequate in the face of tariff shocks, and policy makers have to rely on real-time data and high-frequency indicators to grasp the pulse of the economy. A study by the St. Louis Federal Reserve shows that small and medium-sized enterprises are 3-5 times more sensitive to tariffs than large enterprises, which may lead to structural changes in the job market. What's even more tricky is that tariffs have non-linear characteristics that disrupt the supply chain, and their full impact may not fully manifest until the next 6-12 months.

Summary and outlook

The current policy stalemate may only be the tranquility before the storm. With the adjustment of enterprise inventory cycles and delayed investment decisions, the economic data for the third quarter may provide clearer policy guidance. But the market seems unable to wait for the official signal that the credit derivatives market is pricing higher default risk, and the continued flattening of the treasury bond bond yield curve indicates recession concerns. In this policy fog, the Federal Reserve needs to avoid premature relaxation of vigilance that could lead to uncontrolled inflation, while also preventing excessive tightening that could trigger an economic hard landing. This summer, Powell and his colleagues will perform a precise monetary policy tightrope show, and the global economy will be the audience for this performance.