By Nick Timiraos 

Jerome Powell is entering the most perilous stage yet of his tenure as Federal Reserve chairman, fighting to keep the U.S. from recession while taking the blame from President Trump for skittish markets and a slowing economy.

Mr. Trump's unyielding criticism of the Fed has led people inside the central bank to feel like they are fighting to both buoy the U.S. economy and preserve the Fed's independence from political interference.

After cutting short-term interest rates in July, Mr. Powell is navigating the Fed toward more rate reductions, though conditions could change. The debate among his Fed colleagues is how much to move rates and when, as well as how to best frame the decision, which will be scrutinized by markets and the White House.

Mr. Powell is scheduled to speak Friday at the annual central bank conference in Jackson Hole, Wyo., a gathering that many hope will surface clues to the Fed's next move.

Mr. Trump says the economy is slowing because the central bank pushed interest rates too high last year, while many in business and at the Fed say president's own trade policies have triggered market jitters and slowed business investment.

Some analysts said Mr. Powell has at times confused markets over the Fed's plans. His push to raise interest rates in December, and his defense of further increases, added to year-end market volatility. In hindsight, these analysts said, it was a mistake. Mr. Powell led his colleagues to reverse course within weeks.

The stakes are high all around. Wall Street forecasters have raised their odds of a recession, and the state of the economy in 2020 will influence Mr. Trump's reelection effort.

"I think our economy is very, very good," Mr. Trump said Sunday. "If it slowed down, it is because I have to take on China and some other countries."

The president ripped Mr. Powell as "clueless" after markets dropped last week, the latest in a string of disparaging remarks from Mr. Trump since appointing Mr. Powell to lead the Fed. Mr. Trump has lauded economic systems, such as in China, where central banks are under tight control, a view that has raised worries among current and former Fed officials.

"He's made clear in various interviews and tweets that he doesn't believe that the Fed should be independent," former Fed Chairwoman Janet Yellen said of Mr. Trump last week during an interview on Fox Business Network's "WSJ at Large" program.

The president's attacks "for any Fed chair would be a reason to feel stress," Ms. Yellen said. "But you know I admire what Chair Powell has been doing. I think that he has tried to tune it out."

Fed officials see their independence as critical to markets and the economy. Significant problems, including double-digit inflation in the 1970s, sprang form political pressure on the Fed to keep interest rates too low, officials said.

The central bank raised rates four times last year because the unemployment rate was falling, and inflation reached the Fed's 2% target. Officials broadly supported the decision because they expected inflation to continue rising this year. The Fed shelved plans to keep raising rates after inflation unexpectedly softened and market volatility soared at the end of 2018.

This year, uneven economic developments have "called all of us to look and wonder...did we just get it wrong last year?" said Chicago Fed President Charles Evans.

"Or is it that our assessment of how the economy" would grow has become "more challenged by some of the uncertainties businesses are facing" from trade, Mr. Evans said.

Fed officials and private forecasters say Mr. Trump's trade policy is complicating their task. Twice this year, in early May and after the Fed cut rates on July 31, Mr. Powell sought to express the view that Fed actions were enough to keep the U.S. economy expanding, a pushback against investor appetite for more stimulus. Both times, Mr. Trump within days intensified trade tensions, throwing the Fed's economic outlook into doubt.

Last month, the Fed cut rates by a quarter percentage point to a range between 2% and 2.25%, citing risks from slower global growth and unexpectedly soft inflation. The next day, on Aug. 1, Mr. Trump announced plans to impose 10% tariffs on $300 billion in Chinese imports that weren't already subject to 25% tariffs, a significant escalation in the U.S.-China trade dispute that rattled markets.

"It has become very difficult on a day-to-day basis to predict exactly where the administration is going to be on its policies, or what the next tweet is going to be," said Nathan Sheets, chief economist at PGIM Fixed Income. He previously held senior posts at the Fed and in the Treasury Department during the Obama administration.

Economic forecasts always have a margin of error, he said, "but this is a qualitatively different task, one that the Fed is not trained to deal with."

Weak economic data from Germany and China last week triggered a stock-market selloff and a bond-market rally, with yields on 30-year Treasury bonds falling to their lowest levels ever. The reaction illustrated the growing sensitivity of investors to worries about trade tensions and global growth.

Complicating matters, Mr. Powell has to forge a consensus. The central bank's policy-making group was more divided last month over his push to cut rates than at any other time in his 18-month tenure.

Half of the group's 12 regional Fed bank presidents expressed some reluctance to cut rates leading up to the July 30-31 meeting, largely because they felt the U.S. economy didn't need such a boost, according to interviews and public statements. At the same time, there was little support at the meeting for a rate cut larger than a quarter point.

Boston Fed President Eric Rosengren, who dissented in last month's rate decision, said a diversity of views at the Fed is natural given the uncertainty over trade.

"If I assume no change in trade policy, and somebody else assumes a trade war that reduces both business and consumer confidence, even though the data has been the same, we'll get a very different forecast," he said in an interview before the July 30-31 meeting.

Mr. Powell mentions trade policy in public remarks, but he has avoided any judgments about Mr. Trump's decisions. "We're not in any way criticizing trade policy," he said at his July 31 news conference. "That's really not our job."

Many of Mr. Powell's colleagues will be at the Jackson Hole conference this week, where he and his top lieutenants are expected to begin forging a consensus ahead of the Fed's Sept. 17-18 meeting.

Absent a crisis, Fed officials tend to make big policy moves with caution, making for a culture that is testing Mr. Trump's patience.

"The chair's got a very difficult job. It's not only looking at the data.... It's also getting the committee to the right position in a consensus fashion," said Mr. Evans, the Chicago Fed president, who supported last month's rate cut. "It works better when we're all together on this, as long as we don't delay too much."

Mr. Powell and his top lieutenants, Vice Chairman Richard Clarida and New York Fed President John Williams, have led the Fed to cut rates before economic data showed conclusive evidence of a slowdown.

The Fed leaders have cited research that said when officials were faced with little room to lower interest rates because they are already close to zero, they should use the limited ammunition they have early and fast. They didn't signal more aggressive action after last month's meeting because they didn't see enough evidence of a slowdown to signal alarm. They also ran up against resistance among their colleagues.

Several regional bank officials feared that prematurely providing stimulus to an economy that continued to see steady hiring and consumer spending risked fueling financial bubbles and other troubles.

To seek agreement, Mr. Powell blocks out more than one day on his calendar to meet or speak by phone with all 12 reserve bank presidents and the four Fed governors before every meeting of the rate-setting Federal Open Market Committee.

During the discussions, Mr. Powell isn't in "sell mode," said Richmond Fed President Thomas Barkin "He's very much in listen mode."

Mr. Barkin spent a 30-year career at McKinsey & Co., the management consulting firm, where he served in a senior roles, including finance chief.

"I don't think most corporate CEOs would like his job very much -- or maybe even do his job in the same way," said Mr. Barkin. "The group has to respect that you understand the debate, the challenges -- that you've got a quality of thinking that they are willing to follow."

Mr. Powell's job security has become a regular topic of conversation on trading desks. Mr. Trump has claimed the authority to replace the Fed chair if he chooses, a legal question Fed officials dispute.

The president tapped Mr. Powell for his post in November 2017 and has selected four of the five current Fed governors. Mr. Trump's frustration with those officials this spring led him to announce plans to name more partisan loyalists, and central bank critics, to the Fed's board.

Two of the president's picks, Stephen Moore and Herman Cain, withdrew from consideration after Senate Republicans indicated they weren't likely to win confirmation. Mr. Trump has since said he would nominate two others.

Mr. Powell, a 66-year-old lawyer and former private-equity executive who served in the Treasury Department under President George H.W. Bush, has met privately with members of Congress to build support.

The Fed chief has said he won't allow decisions to be influenced by anything other than economic analysis and central's banks mission to boost employment and maintain stable prices.

"We're human. We'll make mistakes," he told a New York audience in a speech this summer. "But we won't make mistakes of integrity or character,"

Mr. Trump hit back the next day. "He's trying to prove how tough he is because he's not going to get pushed around," Mr. Trump said on Fox Business. "Here's a guy, nobody ever heard of him before, and now, I made him, and he wants to show tough he is."

Last month, Mr. Powell said he wouldn't leave the Fed if Mr. Trump sought to terminate his four-year term, foreshadowing a potential legal fight.

Any court battle about executive authority over the Fed chair could take weeks or months, but the negative market reaction would probably be swift, said former Fed governor Sarah Bloom Raskin, now at the Duke University School of Law

Rep. Maxine Waters (D., Calif.), chairwoman of the House Financial Services Committee, asked Mr. Powell whether he would pack up and go if ordered by Mr. Trump. "Of course, I would not do that," Mr. Powell replied. "My answer would be 'No.'"

Write to Nick Timiraos at nick.timiraos@wsj.com

(END) Dow Jones Newswires

August 18, 2019 18:25 ET (22:25 GMT)