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.
The scale of Mr. Powell’s problem could be seen in the closely watched “dot plot” released on Wednesday, a chart that shows where each of the Fed’s 19 policymakers expect interest rates to be over the next several years. The latest version indicated that most officials expect another half percentage-point reduction in borrowing costs this year, which would bring interest rates to a range of 3.5 to 3.75 percent.
Yet way down at the bottom of the chart stood a lone dot. That reflected one policymaker’s view that interest rates should end the year between 2.75 percent to 3 percent, substantially lower than current levels.
The forecasts are anonymous, but all signs point to that dot belonging to Stephen Miran, the Fed governor who Mr. Trump tapped in August and was sworn in as a member of the Fed’s Board of Governors just before the central bank’s two-day meeting began on Tuesday.
Mr. Miran — who still has ties to the president because he has decided not to resign from his role as chair of the Council of Economic Advisers — was raced through the Senate confirmation process at the behest of the White House, which wanted him in place in time to vote on interest rates on Wednesday.
He immediately made himself known, voting against the Fed’s decision in favor of a bigger, half-point reduction. If it was indeed Mr. Miran, the dot plot suggests that he supports two more big cuts at each of this year’s remaining meetings.
The fact that Mr. Powell did not have to contend with more formal dissents was a feat, given that at the previous meeting in July, the decision to hold interest rates steady was opposed by two other members of the board. At the time, Christopher Waller and Michelle Bowman wanted a quarter-point cut. In the lead-up to September’s meeting, some policymakers had even questioned whether it was the right time to lower borrowing costs when inflation was accelerating once again.
But forging any kind of consensus is bound to remain difficult so long as the Fed’s goals of low, stable inflation and a healthy labor market stay in tension with one another.
Officials actually appeared fairly divided over where to take interest rates this year. Six of the 19 policymakers penciled in no more cuts this year. One official submitted what is known as a “soft dissent” by penciling in a forecast for interest rates to have stayed at the previous level of 4.25 to 4.5 percent. Another two forecast only one more quarter-point reduction.
Mr. Powell framed the decision to lower interest rates as a “risk management” move to protect the labor market from weakening. In doing so, he signaled that the Fed was now prioritizing that goal over containing inflation.
Jonathan Pingle, who used to work at the Fed and is now chief U.S. economist at UBS, said that pivot made sense at a time when the labor market was really losing momentum and the primary source of price pressures — Mr. Trump’s tariffs — was not something the central bank could do much about.
“Their tool is primarily restraining the labor market, and it’s doing so at a time when those downside risks have increased,” said Mr. Pingle. “It seems reasonably appropriate that if you’re weighing those two risks that you should address the risk you’re better able to address rather than the risk you can’t.”
The severity of the inflation threat also matters. Mr. Powell on Wednesday said that the prospect of a “persistent inflation outbreak” had lessened given that tariffs had raised consumer prices by a lesser magnitude and more gradually than first feared.
“Unless you think you’re really dealing with a runaway inflation, you’re not going to risk a recession,” said Diane Swonk, chief U.S. economist for the accounting firm KPMG.
But the Fed’s decision to focus on the labor market represents somewhat of a gamble, when it is not entirely clear whether the slowdown in monthly jobs growth is a function of falling demand or a reduced supply of workers as a result of Mr. Trump’s immigration crackdown.
Indeed, Mr. Powell noted on Wednesday that policymakers had in the aggregate revised higher their forecasts for growth for this year and next, while maintaining that the unemployment rate would rise only marginally to 4.5 percent and then decline. As of August, it stood at 4.3 percent.
Michael Gapen, chief U.S. economist at Morgan Stanley, said the Fed should be wary about lowering interest rates too much against this backdrop.
“The cost to them could be a much more prolonged overshoot of inflation that calls into question their inflation credibility,” he said.
Colby Smith covers the Federal Reserve and the U.S. economy for The Times.
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