Federal Reserve Confronts Lose-Lose Scenario Amid Haphazard Tariff Rollout

Central bank prepares for difficult judgments, emerging divisions regarding when to cut rates

- Nick Timiraos

The haphazard rollout of President Trump's tariff policy threatens to put the Federal Reserve in a lose-lose scenario: Navigate a recession or manage a period of stagflation.

How the Fed negotiates tricky communications around these trade-offs will be front and center at officials' two-day policy meeting this week.

Fed Chair Jerome Powell and his colleagues are on track to extend their wait-and-see stance on cutting interest rates and strategize how to refine it. This calculated patience reflects officials' determination to avoid prematurely abandoning their inflation fight.

The problem for the Fed amounts to a goalkeeper's dilemma: Dive right to address inflation by keeping rates where they are, or dive left to counter weaker growth by cutting rates. "We'll make what will no doubt be a very difficult judgment," Powell said last month.

Acting early to cushion the economy against a slowdown risks adding to short-term inflation pressures from tariffs or shortages.

"This is not going to be a cycle where the Fed pre-emptively cuts because there's a forecast of a slowdown. They're going to actually need to see it in the tangible data, in particular the labor market," said Richard Clarida, who served as Powell's second-in-command for three years and is now a senior adviser at bond giant Pimco.

Waiting for that economic weakness to show up means tolerating risks of a deeper recession.

"Over seven years, the Powell Fed has a track record of waiting to be very sure about the data and then going very fast. I would imagine if you see a notable deterioration in the labor market, at that juncture the Fed will be prepared to move," said Lael Brainard, who served as Fed governor from 2014 until 2023, including as vice chair during her last year.