Fed, under pressure to cut rates, tries to balance labour market and inflation – while avoiding dreaded stagflation

The Federal Reserve is in a nearly impossible spot right now.

- By JASON REED Associate Teaching Professor of Finance, University of Notre Dame

Markets are expecting a quarter-point interest rate cut to a range of 4% to 4.25% when the Fed policy-setting committee concludes its latest meeting on Sept. 17, 2025. After all, the slowdown in the jobs market, as well as a massive revision to past figures showing close to a million fewer jobs were created than previously reported, makes a strong case for lower interest rates to shore up the economy.

But at the same time, inflation — the other component of the Fed’s dual mandate — has begun to accelerate again.

As rising tariffs squeeze consumer spending in sectors exposed to the harshest tariffs — such as clothing and electronics — other inflationary pressures loom over the horizon.

A slowing economy or rising inflation is a circumstance that policymakers want to avoid. But as an economist and finance professor, I’m increasingly concerned about the risk that they happen at the same time —a horrible economic condition known as stagflation — and that the Fed may be too slow in responding.

Between a rock and a hard data point

The Fed has been under pressure to cut rates for some time — including from President Donald Trump.