As widely expected, the Federal Reserve trimmed its policy rate by a quarter point on 17 September. The move was well-telegraphed, and Chair Jerome Powell dutifully explained the reasoning. Unfortunately, what comes next is anyone’s guess — and there’s very little the central bank can do about it.
The Fed now faces the early symptoms of stagflation: inflation running above target and a labour market losing momentum. It only has one lever — the policy rate — and can’t possibly achieve both price stability and full employment when the two goals point in opposite directions. For the moment, Powell’s balancing act is helped — or hindered, depending on one’s politics — by the White House: its clampdown on immigration has tightened the labour market. At the same time, new tariffs have contributed to stoking inflation.

As Powell explained, the balance of risks has shifted. Hiring has slowed, though not enough to push up unemployment, since labour supply has also shrunk. The weaker demand for workers justifies a small rate cut — but, as Powell also noted, it’s impossible to know whether more will be needed. The Fed’s famous “dot plot” suggests two further 25-basis-point cuts this year, though opinions inside the committee diverge wildly.

Powell emphasised that there is no preset plan — which, frankly, is a relief. In this environment, a roadmap would be worse than useless.
Equally encouraging — perversely — is that the Fed is now being criticised from all sides. The inflation hawks point to slightly higher forecasts for 2025 (2.6% versus 2.4%) and lower unemployment expectations (4.4% rather than 4.5%) and demand to know why rates are being cut at all. Democrats, meanwhile, argue that long-term inflation expectations remain well-anchored and that a pause in hiring requires bolder action before it becomes a genuine jobs crisis.

Both sides have a point — and both are probably wrong. The hawks ignore the possibility that tariffs could produce only a temporary burst of inflation, making tighter policy exactly the wrong medicine just as the labour market softens. The doves, for their part, seem blissfully unaware that looser policy might reawaken inflation expectations — the classic recipe for persistent stagflation and an eventual reckoning. The Fed, caught in between, can’t satisfy both mandates; it can only juggle the risks and pray not to drop them.

Complicating matters further, the central bank’s independence is once again under political siege. White House adviser Stephen Miran joined the Fed’s board for this decision, taking unpaid leave from his government post, and immediately voted for a deeper, 50-basis-point cut. The other Trump-appointed governors — Michelle Bowman and Christopher Waller — sided with Powell and the rest in favour of the more modest move, a fragile show of unity unlikely to last. Beyond this month, opinions on what constitutes an “appropriate policy” vary widely.
That diversity of views might, for now, help investors avoid taking the dot plot as gospel. However, the gain will be short-lived if the Fed appears divided, politicised, and no longer committed to its 2% inflation target. For the moment, that credibility still holds. If it cracks, today’s problems will look quaint by comparison.
In the end, the Fed’s September cut was the easy part. What follows is the hard one: trying to steer through political crossfire, an uncooperative labour market, and an inflation problem that refuses to take the hint.