Powell walks a tightrope as the U.S. economy strains beneath inflation and weak hiring

14 October 2025

U.S. Federal Reserve Chair Jerome Powell speaks during a press conference, following the issuance of the Federal Open Market Committee's statement on interest rate policy, in Washington, D.C., U.S., September 17, 2025. REUTERS/Elizabeth Frantz/File Photo

On Tuesday in Philadelphia Federal Reserve Chair Jerome Powell delivered remarks that captured the tightrope on which U.S. monetary policy now balances. He spoke to an economy that has shown surprising strength in growth and productivity gains even as uncertainty lurks in the shadow of tariffs, immigration changes, and a government data blackout caused by a shutdown.

With key data delayed, the Fed is operating in partial darkness. The jobs report for September has been postponed and other critical indicators remain unavailable, creating a vacuum of fresh information just as the next policy meeting approaches. Investors widely expect the Fed to begin cutting rates, likely by a quarter point, trimming the benchmark rate toward a target range of 3.75 to 4.00 percent, with a further move possible in December.

Powell faces an economy pulled in opposing directions. On one hand the expansion appears robust: recent revisions suggest third-quarter GDP could approach 4 percent, a pace few would have confidently predicted given the weight of trade frictions and regulatory uncertainty. On the other hand, the labor market is sending mixed signals. Some private indicators point to slack in hiring, while unemployment officially held at 4.3 percent in August, still near what many economists consider full employment.

Within the Fed itself opinions diverge sharply. Some policymakers stress that inflation remains above the 2 percent goal and likely to persist, making restraint essential. Others emphasize the fragility of employment and warn that overzealous rate cuts could ignite inflationary expectations that spiral out of control. Fed Governor Christopher Waller has captured the dilemma: the Fed must choose whether growth will pull jobs upward or whether jobs will drag growth downward.

Earlier this year the Fed moved cautiously, cutting rates by a quarter of a point as a nod to softening labor conditions while trying to avoid loosening too much. Now with missing data and diverging signals the risk of error tilts both ways. Some Fed members worry inflation expectations could become unanchored if cuts are too aggressive. Others fret that failure to ease would suffocate an already fragile jobs upswing.

Optimists see a hidden opportunity. They point to a possible productivity surge, especially driven by investment in artificial intelligence and capital deepening. They suggest that growth could strengthen without stoking inflation, giving the Fed room to maneuver. Philadelphia Fed President Anna Paulson has flagged this possibility and called for modest rate reductions while guarding against overheating.

Yet even proponents admit the gains rest on a narrow base: high incomes, business investment, and tech adoption have taken the lead, while more broad-based consumer demand remains uneven. Meanwhile firms may have absorbed tariff shocks by cutting margins, suppressing costs or productivity. But as those buffers thin, much of the burden of adjustment may fall on consumers and businesses in the year ahead.

Forecasters surveyed by the National Association for Business Economics expect inflation by the Fed’s preferred measure to hover around 2.5 percent over the next year. Others are less sanguine. Harvard’s Karen Dynan sees inflation possibly rising to 3.3 percent across 2026 as tariff costs seep into final prices.

As Powell and company prepare for their next meeting, the margin for error is slim. Too much tightening risks stifling growth or more directly, undermining employment. Too much easing risks awakening inflation that has long seemed tamed. In that sense Fed watchers wonder not whether Powell will act, but whether he can act precisely enough.