The Federal Reserve faces a daunting challenge in seeking to guide the U.S. economy clear of stagflation, Chair Jerome Powell said following the central bank’s September 2025 policy meeting, warning there is “no risk-free path” ahead for the central bank. The frank admission highlights how policymakers are navigating an environment marked by persistent inflation and slowing economic growth, with significant risks on every side.
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.”
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.”
