By Peter Reagan
Have you ever had one of those conversations that start off, “I’ve got good news, and I’ve got bad news for you?”
Most of us have, and they’re never fun because, let’s be honest, no one really likes having bad news even if there is good news in the package somewhere.
Unfortunately, the Federal Reserve, which many people still think of as a major contributor to the health of our economy (and, to be fair, does have a significant influence on it), is facing one of those good news/bad news situations with an added twist:
Even with some “good” news, the choice that the Fed has to make is between two options that no one likes.
In the interest of being nice, let’s get to the bitter pill later and start with…
What is the good news?
The good news is that inflation is “less bad” (yes, that is the phrase that the Associated Press used).
So, inflation isn’t as bad as it was. That’s the good news.
But you’ll notice that they didn’t say that the inflation rate is “good.”
And that’s because, based on the Fed’s target inflation rate… and what it feels like every time that we go shopping,, the inflation rate isn’t good (which is the first part of the bad news, if you hadn’t already guessed).
Inflation has improved somewhat. The Bureau of Labor Statistics (BLS) reports consumer prices rose 3.4% over the 12 months ending in July, down from 3.5% in June.
But historically the Fed focuses instead on the personal consumption expenditures (PCE) price index. The latest available PCE reading was 3.7% year-over-year, well above the Fed’s 2% goal. (Why do they pay more attention to PCE than CPI? I don’t know, but I don’t want to get sidetracked here. I’ll explain in a later article.)
To the Fed’s credit, several higher ups at the Fed are talking about what to do.
For example, the Cleveland Federal Reserve Bank President, Beth Hammack, is calling for the Fed to raise interest rates now to bring the inflation rate down.
Cleveland Fed President Beth Hammack has gone further. At the Fed’s July meeting, she joined Minneapolis Fed President Neel Kashkari and Dallas Fed President Lorie Logan in voting for an immediate quarter-point rate increase.
Fed Governor Christopher Waller has been more cautious. In July, he said tighter policy could be necessary if inflation remained elevated – but Waller ultimately voted with the majority to hold rates steady at the July meeting.
On the other hand, Richmond Fed President Tom Barkin is less certain. He argues that some of today’s inflation comes from temporary shocks – including higher oil prices, tariffs and AI-related demand – that could fade. Current interest rates may already be restrictive enough to push inflation lower.
But Barkin isn’t ruling out another hike. He calls that an “open question,” warning that persistent inflation could become more deeply embedded. He’s not saying inflation will solve itself. He’s saying there’s a credible case for waiting and a credible case for tightening. That looks like a mighty uncomfortable fence…
And Fed Chair Kevin Warsh? He’s talking about reevaluating how the Fed “understands and responds to the drivers of inflation.” He’s launched a broader review of the bank itself, and one of five new task forces will specifically reconsider the Fed’s inflation metrics.
This isn’t merely an academic debate! At its July 29 meeting, the FOMC voted 9-3 to keep its target rate at 3.50%-3.75%. This is kind of a big deal. As the WSJ reported, “Not since 2016 have three officials dissented in the same direction.” Dissents aren’t rare, although most Fed chiefs prefer unanimous agreement.
All this to say, the Fed has made a decision for now: Hold interest rates where they are. But disagreement over what comes next is unusually public…
The second bit of bad news
The second bit of bad news is that the economy is showing indicators that, to be fair, make it more difficult to come to a clear direction to move into by the Fed.
To understand the disagreement, it helps to understand the Fed’s dual mandate. Congress has instructed the central bank to pursue two goals:
- Maximum employment – Oddly, there’s no specific numerical target for this, because “it is not possible to know exactly how high employment may be able to rise without causing excessive inflation”
- Stable prices – The Fed currently defines “price stability” as inflation averaging 2%
When unemployment is high, lowering interest rates encourages borrowing, business expansion and creation – and lower unemployment.
When inflation is high, raising rates discourages borrowing, slows credit creation and spending – and lower inflation.
The trouble comes when inflation remains high while employment and economic activity begin weakening.
In other words, the dual mandate is the Fed working two ends of a seesaw where moving one end affects the other.
Considering that inflation has remained above (sometimes far above) the Fed’s 2% target for more than five years now, it’s understandable that policymakers are reconsidering how they measure inflationary pressures and respond to them.
But the drivers on the other side of that mandate, the economic growth and interest rate drivers, are already elevated, too. We’ve been regularly discussing the housing market slowdown, for example. That’s what happens when inflation drives home prices to record levels – and then higher interest rates make those record-level prices even more unaffordable.
If the Fed could just choose one mandate, their job would be easier. But they can’t – they have to balance both. And that balancing act is getting harder day by day…
The Fed’s path is getting narrower
Then came the July jobs report.
The BLS reported that nonfarm payroll employment fell by 23,000 in July. That doesn’t mean the labor market is collapsing – unemployment held steady at 4.1%, and one month doesn’t make a trend.
Still, it’s one more warning sign the Fed can’t ignore.
And this is where the Fed’s dilemma becomes much easier to see.
Inflation is still running well above the Fed’s 2% goal. That argues for keeping monetary policy restrictive – or, as Beth Hammack, Neel Kashkari and Lorie Logan argued at the Fed’s July meeting, raising rates even further.
But weaker job growth argues for caution. Higher rates make borrowing more expensive and tend to restrain spending and business activity. Push too hard, and the Fed risks putting additional pressure on an economy that is already showing signs of strain.
Cut rates too soon, though, and there’s a risk persistent inflation gets another chance to take hold.
So what did the Fed do?
For now, neither. That vote tells us something important.
The Fed isn’t choosing between one obviously right policy and one obviously wrong one. It’s trying to decide which risk is greater.
Is persistent inflation the bigger threat? Then rates may need to stay higher for longer – perhaps even rise again. Yes, that would drive unemployment higher and force home prices into correction.
Is economic weakness becoming the greater danger? Then higher rates would do more harm than good.
Or maybe current rates are already restrictive enough, and the best move is simply to wait?
I don’t know which path the Fed will choose. More importantly, neither do the people sitting around the FOMC table. Their 9–3 vote makes that disagreement unusually clear.
For savers, I think that uncertainty is the larger lesson.
You and I can’t decide where the Fed sets interest rates. We can’t control inflation, employment or mortgage costs. And we certainly can’t know in advance whether policymakers will get the balance exactly right.
What we can control is how dependent our savings are on any single economic outcome.
That’s one reason some Americans choose to diversify a portion of their savings with physical precious metals. Gold has a long history as a store of value outside the monetary-policy decisions we’ve been discussing here – though, like any asset, its price can rise and fall.
If you’d like to learn more about holding certain IRS-eligible physical precious metals inside a tax-advantaged retirement account, you can start with our free 2026 Precious Metals Information Kit.
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