The Fed is in a 'goalkeeper's dilemma'. If they maintain interest rates unchanged to address inflation, it may lead to further economic slowdown; if they cut rates to stimulate the economy, it may worsen short-term inflation pressure caused by tariffs or supply shortages.

Through the perspective of former Fed Vice Chairman and current Pimco Senior Advisor Richard Clarida, the article implies that the Fed will closely monitor changes in the labor market, using employment data as an important reference for its decisions:

"The Fed will not cut rates early due to anticipated economic slowdown; they need to see actual data, especially in the labor market."

Former Fed Governor Lael Brainard also believes:

"For the past seven years, the Fed under Powell has a record of waiting for very certain data and then acting quickly. I think if you see a significant deterioration in the labor market, the Fed will be ready to act."

In a dilemma, the Federal Reserve is more likely to 'protect inflation'?

Timiraos points out that the Fed sometimes focuses on maximizing the best outcomes when setting rates, such as cutting rates when inflation falls; at other times, they focus on minimizing the worst outcomes, like aggressively raising rates in 2022-2023 to curb high inflation, even at the cost of economic growth.

The article emphasizes that tariffs may force the Fed to 'take the latter path'. Because tariffs may push prices higher in the short term, their uncertainty may slow economic activity, bringing signs of stagflation, which may cause the Fed to delay rate cuts.

But one unresolved question is how the Fed will respond once there are clear signs of a deteriorating job market? Because the higher the unemployment rate, the more justified the reasons for cushioning the economy through lower interest rates.

The article points out that an important challenge is determining the duration and magnitude of expected price increases caused by tariffs and potential supply disruptions.

Former Fed Governor Brainard pointed out:

"If unemployment rises and the Fed considers cutting rates, the limiting factor will be how much inflation has actually risen."

The Fed's communication strategy is crucial for stabilizing inflation expectations.

In the dual dilemma of recession and inflation pressure, the article emphasizes the management of inflation expectations.

The article states that if consumers and businesses expect inflation to eventually decline, then inflation expectations will be "anchored", making the cost of reducing inflation relatively low. However, if inflation expectations run wild, controlling inflation will become more difficult.

The article further points out that compared to five years ago, the 'limiting factors' mentioned by Brainard have worsened, as the economy has recently experienced a period of very high inflation. Even if the Fed may consider cutting rates, it still needs to remain vigilant about inflation in public to stabilize market expectations.

Goldman Sachs Vice Chairman and former Dallas Fed President Robert Kaplan bluntly stated:

"Even if I consider finding a way to cut rates, I would take a hawkish stance because I want to keep these inflation expectations stable."

Complicating matters, Trump has repeatedly publicly criticized the Fed's strategy, and Timiraos believes this makes the Fed's communication strategy more complicated; to guide market expectations, Powell may need to be more cautious in his wording.

If Powell's statements are more dovish, it may not help prevent the economic slowdown caused by cost increases triggered by tariffs or uncertainty; if the statements are more hawkish, it may actually affect price and wage-setting behavior.

Are price increases caused by tariffs temporary? There are still differences within the Fed.

The article states that currently, Fed officials unanimously believe that it is inappropriate to cut rates before seeing clear signs of consumer spending slowing and unemployment rising. However, there are differences among officials regarding whether price increases caused by tariffs and supply shortages will be temporary.

Former Boston Fed President Eric Rosengren believes that if it weren't for the short-term price increase threat brought by tariffs, the Fed would likely have already started cutting interest rates. He suggests that the Fed should cut rates when the economy deteriorates, as rate cuts can offset weak demand but do nothing to resolve supply chain disruption issues.

Rosengren expects that once demand weakens, the Fed may need to make larger cuts, such as a 50 basis point rate cut.

Fed Governor Christopher Waller recently stated that tariffs will not push prices higher after this year and advocated that the Fed should take proactive action to support economic growth.

However, other officials, including Cleveland Fed President Beth Hammack, are cautious about inflation risks:

"I would rather move slowly and in the right direction than move quickly in the wrong direction."

At the end of the article, Timiraos quotes Kaplan's view:

"The Fed can sometimes lag. This is a fact. Sometimes being patient and risking lagging is prudent."