Federal Reserve Chairman Powell is facing the most difficult policy decision of his career. The sudden announcement of large-scale tariff increases by the Trump administration is like an "economic nuclear bomb", igniting a dual crisis of soaring inflation and economic recession. This perfect storm triggered by trade policy has pushed the Federal Reserve into its most severe policy dilemma in 40 years - to deal with a possible economic recession while containing the imminent outbreak of inflation.

The shadow of economic recession hangs over us

The business community and financial markets have sounded the alarm. Compass Diversified Holdings CEO Sabo revealed that its subsidiaries have begun to urgently freeze recruitment and cut costs in preparation for the upcoming economic winter. What is even more worrying is that this crisis may affect the consumption of the previously strong high-income group. Former Federal Reserve economist Tracy warns that the current situation is more severe than imagined: "This administration has brought the worst impact to the Federal Reserve, and they are powerless now

The inflation monster is making a comeback

The most direct impact of tariff policies is soaring prices. From automotive parts to clothing raw materials, the prices of imported goods have skyrocketed across the board. What's even more tricky is that this kind of inflation may be persistent - as experience during the pandemic has shown, a one-time price increase often evolves into long-term inflation. Reinhardt of Bank of New York Mellon pointed out, "After the price of cars increases, insurance costs will inevitably follow suit, and this chain reaction will make inflation more difficult to control

The policy toolbox is stretched thin

The conventional weapons of the Federal Reserve seem inadequate at this time. Cutting interest rates may exacerbate inflation, while maintaining interest rates will accelerate the economic downturn. Powell's statement last week that there is no need to rush to cut interest rates implies this helplessness. Even worse, the abnormal surge in 10-year US Treasury yields indicates that the market is losing confidence in US assets. Former Federal Reserve Governor Mayer admitted, "It's difficult for the Fed to explain this dilemma to the public

Summary: The Fed's tightrope game

Faced with this perfect storm, the Federal Reserve is performing a thrilling balancing act. Just like a goalkeeper facing a penalty kick, they must make a momentary decision between saving inflation and rescuing the economy. Trezzi's pessimistic prediction: "Perhaps we can only rely on luck to make choices." What the market is more concerned about is that this crisis may evolve into a turning point for US economic hegemony - when the trade war escalates into a capital war, even the Federal Reserve will have no way out. In this summer full of uncertainty, Powell's policy bullets may be running low.