US think tank criticizes Trump and Powell: The Federal Reserve (FED) has over-lowered interest rates, "inflation is about to get liquidated," economics has completely malfunctioned.

Adam Posen, director of the Peterson Institute for International Economics, warned that based on specific policy models, regardless of economic growth performance, the United States may face high inflation, or even fall into the danger of economic stagnation and high inflation. (Synopsis: Unexploded bomb this summer: Trump has the right to "fire Powell" after May to control the US Federal Reserve to cut interest rates? (Background supplement: Ball crushes interest rate cut hopes + Huida chip is regulated, bitcoin falls back to 84,000, and U.S. stocks face another sharp sell-off) The Peterson Institute for International Economics (PIIE), one of the two nonpartisan think tanks in the United States, recently issued a warning about Trump's tariff policy. Adam S. Posen, who believes that the United States may be headed for devastating "stagnant inflation" under the Trump administration's reciprocal tariff policy, and believes that the current Fed has cut interest rates excessively and may need a longer observation period or other interventions. In his recent speech, Posen put forward a different economic outlook forecast from the mainstream economic community, and PIIE speculated based on economic models of the US economy and the Trump administration's past economic models, that Trump's current policy approach, especially those aimed at trade closure and using US economic uncertainty as a weapon, will inevitably lead to higher inflation and other disasters, accompanied by worse economic growth performance in the short and medium term. Posen stressed that this is not just chaos or temporary policy mistakes caused by temporary market failures, but may represent a fundamental shift in the U.S. economic policy system (including conventional, institutional, and conventional) that deviates from the economic governance track followed by the two major U.S. political parties over the past few decades, heralding a challenging new era. At the heart of this potential policy framework are two deadly commitments: Significantly "shut down" the U.S. economy through tariffs and other means, reducing trade and investment with the world Using policy "uncertainty" as a trade weapon Posen added that the Trump administration creates unpredictability in dealing with international relations and trade disputes to gain a short-term advantage. Combined, these two strategies will not only directly reduce the real income of U.S. households (because imports are more expensive and exports are blocked), but more importantly, they will together constitute a sustained "negative supply shock", which means that the economy's production potential will decline, and the supply of goods and services will become more expensive and scarce. Economic theory tells us that negative supply shocks do not necessarily lead to inflation, because there is room for flexibility between the market and the money supply, and Posen further explained that if the central bank (the Fed) can firm its stance on price stability, and market participants believe that the central bank will do so, then the economy may experience a painful but necessary "real adjustment" – that is, output falls, unemployment rises, but inflation is eventually brought under control. This is similar to the austerity policies that Britain tried to pursue in the early days of the Great Depression or President Hoover and Treasury Mellon in the early days of the Great Panic, but Posen sternly points out that this is theoretically unlikely in the current political climate. He argues that due to the political pressures and instability of modern democracies, it is almost impossible for governments and central banks to turn a blind eye to the economic pain caused by supply shocks, so political pressure can force policymakers to take action to cushion the shock, which often means tolerating or even promoting inflation, especially in fiscal instruments. In this case, the general economic laws that used to apply to the United States will be overturned, and the response pattern will be more like that of a typical emerging-market country: instead of being solved by an effective market price mechanism, supply shortages will stimulate more protectionist measures, industry-specific subsidies, and government intervention, which in turn will exacerbate supply shortages and resource misallocations, creating a vicious circle. At the same time, U.S. allies, in response to this policy uncertainty, may seek to self-insure, build alternative supply chains, and reduce dependence on U.S. products and markets, which will further weaken the long-term economic position of the United States. The Root Causes of Loss of Control: Fed to Structural Problems Posen went on to give examples of specific reasons for the intensification of current inflationary pressures, first criticizing the Fed for possibly being too complacent in its management of "inflation expectations" in the United States, and although some potential members of the government have accused the Fed of creating inflation in the past, they now seem paradoxical that inflation expectations can remain stable and price transmission effects will not occur even with tariffs and currency depreciation. Posen thinks this is silly wishful thinking, and he suspects that the current monetary policy may be more accommodative than the Fed expects, because the "neutral interest rate" (R-star), which measures the potential level of interest rates in the economy, may have risen structurally, and even if the Fed has stopped reducing its balance sheet, looking at indicators of financial conditions, such as corporate bond spreads, does not show a substantial tightening of credit conditions. Potential deregulation, increased market concentration due to encouraging mergers and acquisitions, and protectionist tendencies for domestic firms will give firms greater market power to raise prices, meaning that tariffs and supply shortages will be more directly reflected in the eventual price rise. Structural factors, such as tighter immigration policies, could lead to persistent labor shortages, especially in key sectors such as construction, which will push up wage costs and service prices. The housing market itself is also facing supply bottlenecks, which, combined with higher prices for imported building materials (such as Canadian lumber) and other real estate-related imports (such as air-conditioning equipment made in China) due to tariffs and other factors, will jointly drive up the cost of living. Finally, Posen also proposed the theory of "government failure" (called "Doge" – Dysfunction of Government Effectiveness) risk, the risk of contagion of uncertainty within government departments, such as the threat of a government shutdown and the uncertainty of civil servants and contractors about future policies, which may lead to delays in critical infrastructure projects, inefficient public services, and reduced reliability, which in itself constitutes a negative supply shock. Affect the normal functioning of the economy. Probability of Stagnation Inflation Increases In terms of economic growth, Posen's forecast is equally pessimistic, estimating that the risk of the US economy falling into recession is as high as 65% in this policy environment. He argues that unless the government implements a "massively irresponsible fiscal stimulus", it will be difficult for growth to exceed 1%, because the main growth engines will be subdued: consumption will be weakened by falling real incomes and increased uncertainty; Business investment will stall due to continued policy uncertainty; Net exports will be weighed down by trade barriers and international tensions. So the only thing that will drive book growth in the short term seems to be massive government spending that could lead to future problems. Taken together, Posen believes that the most likely scenario is "stagflation" – a stagflation or even contraction in economic growth accompanied by high inflation. This is the trickiest situation for policymakers, because the traditional policy tools to deal with recession (which requires stimulus) and inflation (which require austerity) are contradictory. Such a situation would seriously damage the living standards of American families, the business environment in which they operate, and the long-term competitiveness of the United States. Posen concludes by concluding that the Trump economic policies he described represent a fundamental break with mainstream American economic thought over the past half-century, and attempts to weaponize uncertainty and allow the United States to retreat from the global economic system will not only harm the United States' self-esteem.