For the Federal Reserve, there are no good options. Its chair, Jerome H. Powell, made that clear on Wednesday, shortly after the central bank cut interest rates for the first time this year.
“There are no risk-free paths now,” said Mr. Powell. “It’s not incredibly obvious what to do.”
The comment was in reference to the tough bind that the Fed now finds itself in at a time when inflation is moving further away from the central bank’s 2 percent target and the labor market is looking much more wobbly. The Fed cannot address both issues simultaneously, and trying to resolve one typically jeopardizes the other.
“Our tools can’t do two things at once,” added Mr. Powell.
The Fed’s cut on Wednesday brought interest rates down to a new range of 4 percent to 4.25 percent.
What the Fed is now trying to figure out is how quickly it should bring interest rates to a “neutral” level that neither speeds up growth nor slows it down. If it moves too slowly, it risks causing undue economic damage. If it moves too quickly, it risks stoking inflation.
“You’re making the decision to either move toward neutral and run the risk that the labor market data is stabilizing and you just don’t have proof yet; or sit tight and stay on guard against inflation, and find out that actually we’re deteriorating in real time,” said Michael Pugliese, a senior economist at Wells Fargo.
An already tenuous situation is being further complicated by President Trump’s attempts to undermine the Fed’s political independence in order to push borrowing costs much lower.
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