Recap: Fed's Current Position

The Federal Reserve has two mandates: maximum employment and price stability (which they've interpreted as 2% inflation target)

Right now both are under pressure simultaneously.

The path to this point

2021-2022: The "transitory" debate 
The Fed kept rates near zero while inflation began rising. Their "transitory" call wasn't unreasonable, much early inflation came from supply chain disruptions, used car shortages, and energy price spikes. Most economists initially agreed these looked temporary.

The main challenge during COVID was distinguishing between supply shocks (temporary) and demand-driven inflation (persistent).

2022-2023: Decisive action

Once data showed inflation becoming entrenched across multiple sectors, the Fed moved aggressively - raising rates 5.25 percentage points in 16 months. This was the fastest tightening since the early 1980s.

Result: They brought inflation from 9.1% down to around 3ish% without triggering a technical recession.

Current challenge

Interest rates: 4.25%-4.50% (down from 5.50% peak after three cuts in late 2024)

Employment concerns: Job growth has slowed to 35,000 per month over the past three months. Unemployment has risen from 3.7% to 4.2%. Employment data keeps getting revised downward.

Inflation persistence: Core inflation remains at 3.1% - still 55% above the Fed's 2% target. Some sectors show renewed acceleration.

This creates a classic dual mandate tension: address employment weakness or maintain inflation focus.

What makes this situation unique

Internal divisions: Two Fed governors dissented at the July meeting, favoring immediate rate cuts. This level of public disagreement hasn't occurred since 1993.

Political environment: The Trump administration is pressuring for aggressive rate cuts while implementing tariff policies that complicate inflation dynamics.

Data reliability: Recent employment figures have been revised downward significantly, making real-time economic assessment more difficult to fully grasp.

The September Playbook

Markets expect rate cuts with 90%+ probability. The Fed faces three basic options:

• Cut 25 basis points: Address employment concerns while maintaining measured approach

• Hold steady: Prioritize inflation target until more progress achieved

• Cut 50 basis points: Signal urgent concern about economic conditions

Powell's Jackson Hole speech next Friday and the September 16-17 meeting will clarify the Fed's assessment of competing risks.