The Federal Reserve confronts a monetary policy nightmare this week as it deliberates over interest rates while both inflation and unemployment climb simultaneously. This dual deterioration eliminates easy choices, forcing officials to prioritize one problem over the other with their single policy tool.
Between April and September, the economy witnessed inflation accelerate from 2.3% to 3% while unemployment rose from 4% to 4.4%. This simultaneous worsening on both sides of the Fed’s dual mandate creates a dilemma that Chair Jerome Powell described candidly: “We have one tool. We can’t do both of those at once.”
The central bank has already implemented two half-point rate cuts since September, bringing borrowing costs down to a 3.75% to 4% range. These reductions followed a period of aggressive tightening that pushed rates to decades-high levels when inflation peaked at 9.1% in 2022. While lower rates can stimulate employment, they risk reigniting inflationary pressures.
Powell revealed that during October’s meeting, a majority of officials expressed greater concern about labor market weakness than price stability. However, this preference wasn’t unanimous, with significant disagreement about whether a third rate cut before year’s end was appropriate. The internal division reflects genuinely different economic forecasts and varying levels of comfort with risk.
The decision-making process has been further complicated by the government shutdown’s impact on data collection. The Bureau of Labor Statistics was closed for six weeks, canceling October’s statistics entirely. Without this information, and with November’s data arriving after Wednesday’s announcement, officials must navigate blindly through a turbulent economic period. The Federal Open Market Committee’s 12 voting members will reveal their decision Wednesday afternoon, concluding a year when the traditional tools of monetary policy proved insufficient for the challenges faced.