Jerome Powell delivered his remarks as the Federal Open Market Committee announced its first interest rate cut in nine months, lowering the federal funds rate by a quarter-point to a range of 4.0% to 4.25%. The FOMC statement explained that “uncertainty about the economic outlook remains elevated. The Committee is attentive to the risks to both sides of its dual mandate and judges that downside risks to employment have risen.”

Powell told reporters that considering the risks to inflation are tilted to the upside and risks to employment to the downside, it’s “a challenging situation when our goals are in tension like this,” explaining that the Fed’s framework calls for a balance of both sides of the dual mandate for full employment and moderate inflation. “So we have a situation where we have two-sided risk,” he said, “and that means there’s no risk-free path.”

Signs of stagflation

Key indicators point toward the emergence of stagflation—a toxic mix of sluggish growth and elevated prices. Recent government reports showed consumer prices increased by 0.4% in August, pushing annual inflation to 2.9%, the highest since January. At the same time, initial unemployment claims surged to their highest level in four years, with about 263,000 people filing for benefits in the first week of September. Job growth averages have slowed to just 35,000 per month over the last quarter, down from 168,000 per month in 2024. Unemployment has crept up to 4.3%, also the highest in years and another worrying sign for household finances.

Harvard economist Jason Furman commented on Bluesky that “the whiff of stagflation is getting stronger … Given the current situation, the Fed has limited options.” The Fed’s own projections affirm the challenge: inflation is above target, and in June it lowered growth forecasts for the year from 1.7% to 1.4%.

Powell’s comments reflect the fundamental difficulty: cutting rates too aggressively could reignite inflation, while keeping them high risks deepening the economic slowdown. “The Fed is in a pickle, with inflation pulling them one way and a softening job market pulling the other,” Bill Adams, Chief Economist at Comerica Bank, told Fortune in an emailed statement. Bank of America Research has found that cutting rates against a backdrop of rising inflation has only happened 16% of the time since 1973, and the last time was in late 2007, which in retrospect was shortly before the onset of the Great Financial Crisis.

Global and political implications

The Fed’s stance also carries global risks. Higher U.S. interest rates typically strengthen the dollar, putting pressure on emerging markets that borrow in American currency. Foreign central banks face similar dilemmas as the European Central Bank and Bank of England contend with their own stagflation pressures.

The political climate adds further complexity. Powell is dealing with mounting pressure from the White House and Congress, with demands both for relief to prevent recession and vigilance to curb inflation. He sounded a plaintive note in response to a question on what the Fed will do if inflation continues to rise: “Our expectation … has been that inflation will move up this year.” He said this is basically the effect of tariffs on the prices of goods, and the Fed thinks this will be a one-time price increase.

“The situation we’re in is that we see, we see inflation. We continue to expect it to move up, maybe not as high as we would have expected it to move up a few months ago,” but still moving up. He said the Fed will “do what we need to do,” but it’s “quite an unusual situation. How do we decide what to do? Because our tools can’t do two things at once.”