Jay Powell's constraints

Jay Powell did his best impression this week of a Fed chair making his own data-driven decisions about where he should set short-term interest rates. The reality, however, is that the markets and the president are giving him very little choice.

Driving the news: Powell cut interest rates on Wednesday — the first time the Fed has done so in over a decade. In doing so, he effectively fulfilled a prophecy that the fixed-income markets (and even the stock market) had been making for all of 2019. They saw the rate cut coming long before the Fed was willing to admit it, and they were right all along.

Donald Trump has been just as adamant about the necessity of a rate cut — a big one — and this week he worked out how to get what he wants. After the rate cut a few days ago, the market priced in a 64% chance of another cut in September. Less than 24 hours later, thanks to Trump, that probability had risen to north of 95%.

• What we're seeing: The most important new word in the official Fed statement was "global." The Fed is no longer just reacting to domestic conditions; it's looking at an economic slowdown around the world, including China. Trump's announcement of new tariffs ensured that global trade will continue to disappoint and the Fed will continue to cut rates.

What they're saying:

"The president and his trade negotiators believe they have downside protection against the possibility that trade policies will cause any lasting damage to the economy or the stock market. After all, the Fed has very publicly shown that it views it as appropriate to cut interest rates to combat any slowdown related to trade wars."

The catch: Fed rate cuts are better at protecting the markets than they are at protecting the economy. In any case, as economist Nouriel Roubini notes, the Fed doesn't have nearly enough ammunition to protect against a fully fledged trade war.

The bottom line: Now that the Fed is being treated as a marionette by both the markets and the president, its much-vaunted independence is becoming increasingly insubstantial. The less control that Powell has over the Fed's actions, the less power he has.