Jerome Powell may insist that the U.S. economy is in a “solid position”, but the body language of the Federal Reserve’s latest moves—and non-moves—tells a different story. Rates are on hold. Inflation is still above the 2% target. And unemployment? It’s low, but the Fed’s own words betray growing anxiety: “the risks of higher unemployment and higher inflation have risen.”
In other words: stagflation is knocking.
You’d think that would be enough to warrant action. But no. Powell, ever the stoic, declared that “policy rate is in a good place”, and it’s apparently time to “wait before adjusting policy.” Meanwhile, near-term inflation expectations have moved up, and labor market dynamics—once the Fed’s golden child—are no longer as predictable as they seemed in 2023.
Of course, none of this is happening in a vacuum. Tariffs—yes, those old headline hogs—are back in the inflation spotlight. Powell finally admitted that “the tariff increases announced so far have been significantly larger than anticipated.” Their effects? Still “evolving.” Still “uncertain.” In other words, we have no idea what’s coming next.
Let’s not ignore the political landmines either. Remember when a former New York Fed President literally wrote in Bloomberg that “The Fed shouldn’t enable Donald Trump”? That wasn’t subtle. In fact, it laid bare what many suspect: the Fed is not just watching the economy—it’s gaming out the politics, too.
So here we are. Mortgage rates won’t drop, because Fed Funds would need to fall below 2.75% to move the 10-year yield meaningfully. But with Core CPI at 2.8% and historical spreads suggesting a 4.3% Fed Funds rate is “normal”, Powell’s stuck in the middle. Cut rates and you look like you’re caving to the White House. Hold steady, and risk strangling the housing market and the real economy.
And yet, somehow, the official line remains: “We are poised to adapt as conditions evolve.” Translation: we’ll think about doing something if the data really punches us in the face.
But the market sees through it. Traders tuned into Powell’s presser heard a dovish tone, and risk assets rallied—because they know something the Fed won’t say out loud: this isn’t a strong economy with inflation under control. It’s a fragile balancing act, and Powell’s tightrope is getting thinner.
The irony? Powell openly said he can’t say which mandate (inflation or employment) matters more right now. That’s not leadership. That’s hedging. That’s hoping that doing nothing somehow becomes the best decision of the cycle.
But hope isn’t a strategy. And with crude oil whispering inflation into PPI and CPI pipelines, and net export swingsmuddling GDP reads, Powell may soon have no choice but to pick a side.
Jobs or inflation. Choose wisely, Jerome.