Markets in Focus: Federal Reserve Burdened with "Dueling Mandates"

September 15, 2025

The Federal Open Market Committee (FOMC) is firmly committed to fulfilling its statutory mandate from Congress of promoting maximum employment, stable prices, and moderate long-term interest rates. Price stability is essential for a sound and stable economy and supports the well-being of all Americans. The inflation rate over the longer run is primarily determined by monetary policy, and hence the Committee can specify a longer-run goal for inflation.

"Statement on Longer-Run Goals and Monetary Policy Strategy." Federal Reserve, January 24, 2012

Historically, the components of Federal Reserve's dual mandate - setting policies aimed at (1) maximum sustainable employment and (2) price stability - have been largely "symmetric," with economic periods of rising unemployment coinciding with a commensurate decline in prices (and vice versa). 2008 and 2020 are two distinct examples, although this symmetry can be identified in non-recessionary periods as well.

It is when the dual mandates conflict that the resolve of the Fed is truly put to test, where reactionary policies - the customary modus operandi of the central bank - can be ineffective, given the lack of clarity about the economy's longer-term direction. While current readings for inflation and unemployment do not match the extremes of the 1970s stagflation era (high inflation and unemployment), they do evoke a similar takeaway: that prices and employment have disconnected due to fiscal policies since 2020 and 2025 US trade policy.

As we look to forecast future monetary policy and its impact on asset prices, these "dueling mandates" will be top of mind, particularly as the Federal Reserve presumably resumes its rate cut campaign at Wednesday's meeting.

The Labor Market is Showing Signs of Cracking

The unemployment rate bottomed at 3.4% in 2023 and has steadily climbed since April 2023. Initially, the reversal was rightly met with little concern by traders and economists, as one would expect the pace of hiring to slow coming out of a period of zero rates (ending in March 2022) and depression-era fiscal & monetary stimulus due to COVID.

Since 2024, however, the upward trend in the UE rate has become a more salient concern, and supporting data such as the monthly nonfarm payrolls figures (chart) cementing the narrative that the labor market has moved from a resilient plateau to a gradual descent down a path towards possible recession. In a recent, major revision, the BLS downwardly revised close to a million jobs from its payroll data (-911,000 in the 12 months ending March). The current 3-month average for payroll growth sits at a soft 28k, with the last two reports missing expectations by wide margin.

Factors for job market disappointment 2025 include:

• Corporate uncertainty on the impact of tariffs leading to lower investment in labor capital.

• The current Federal Funds Rate (and its direct effect on broad lending rates) has had the intended impact on business investment, particularly on hiring.

• Productivity gains related to AI utilization across industries, particularly in Tech, have spurred companies to reassess the need for fresh hiring and ask themselves how much labor will be needed to generate forecasted output. According to a recent report, the tech sector contributed 0.56% to real GDP growth in 2025 while accounting for negative 0.01% to US job growth.*

Inflation Remains Elevated

Throughout the US government's spending spree prompted by COVID and largely intact since 2020, prices for most goods rose to levels that have become burdensome for the US consumer. Since peaking on a year-over-year basis at 9.1% in June 2022, the Consumer Price Index slowed dramatically until June 2023 at a 3.0% level. Since that point, the monthly YoY inflation rate has remained in the 3% range and is now at 2.9% after an encouraging but short-lived run lower in the beginning of 2025.

Despite the Fed's anchor to price "stability" rather than overall price level, it would be remiss to overlook the latter. The inflation rate is a derivative measure of the prices. Yes, the rate of inflation has settled into levels likely just above the Fed's target range, or perhaps within it after, as indicated by Chair Powell, a reassessment of the neutral level in today's economy, the absence of a period of negative inflation means that we have yet to work off the negative impact of higher prices for goods. Note that historically, rather than through negative inflation rates, prices become tenable for the consumer through (1) time, in the event that price stability entrenches in the economy and (2) rising wages. Although wages have increased alongside prices, they have not kept up the pace (chart below). This two-speed inflation trend has reduced affordability and increased the reliance on debt and credit, presenting latent risks for the financial sector.

Below is a chart of the Fed's preferred inflation gauge, the Personal Consumptions Expenditures (PCE) Index. As you can see, there has been little progress in bringing inflation down since last year. The question is whether it has sufficiently stabilized to turn its full attention to the other side of the dual mandate, i.e., whether it can push forward in earnest with rate cuts without immediate concern of its effect on price stability.

FOMC Meeting Expectations

The Federal Reserve will meet this week and make a critical decision on the path of interest rates on Wednesday. As seen in the chart below from the CME's FedWatch tool, the futures market points to a 96% chance of a 25 basis point cut to rates. By end of year, with three meetings remaining, the expected FF Rate is 350-375bps, 75 basis points lower the current levels.

This Week's Meeting and Beyond

• We expect a 25 basis point cut at this week's meeting, and a press conference that expresses its willingess to cut more if needed. However, we believe the Fed will be more hawkish than others, including the White House, regarding the inflation side of the "dueling mandates."

  
  

• While the annoucement of the baseline scenario for rates (25bps cut) is likely to be met positively by the market, we will soon be headed to a period over the subsequent months in which any inflation reading higher than expected will be met with concern regarding the future path of rates.

  
  

• The Federal Reserve pivoting back to rate hikes is not the primary concern. Rather, it is that a symmetrical focus on both employment and inflation may lead to a reactionary Fed that does not cut in time to ward off a more rapid deterioration in the labor market.

  
  

• Tariffs, similar to oil shocks in the 1970s (albeit at a more modest level), are "exogenous" pressures on prices and growth that make the setting of monetary policy more difficult. The Fed is now burdened with discerning whether a hot inflation reading is a "one-off" event or a sustainable trend that requires action.

  
  

• The full impact of tariffs have yet to be felt, as importers pulled forward inventories and in many cases absorbed the increased cost. At some point, they will need to pass more costs along to the consumer, a future risk that the Fed is keenly aware of.

  
  

• The conversation on monetary policy is taking place amidst an environment of strong earnings growth, surprisingly resilient consumer despite incessant price hikes (the "wealth effect" is our proposed reasoning for the strength, with consumers emboldened to spend as their stock and real estate investments prosper - a feedback cycle that can work both ways), and massive investments in AI-related infrastructure. As long as those three tailwinds remain intact, the market has the potential to continue higher.

Note: this version, originally released on September 15, has a correction for the 3-month nonfarm payrolls figure.

*Rosen, Phil. "AI Is Making Employees So Productive That Tech Companies Have Stopped Hiring." Inc, Sept 15, 2025

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