The Fed: Between a Rock and a Hard Place

The US Federal Reserve finds itself in an unusually treacherous moment. The institution’s dual mandate—maintaining price stability on one side and maximum employment on the other—has rarely pulled so forcefully in opposite directions. Recent revisions from the Bureau of Labor Statistics (BLS) suggest that the labor market, which once seemed resilient, is in fact deteriorating more sharply than previously believed. Job gains thought to have occurred early this summer were revised downward by hundreds of thousands, implying that the cushion of strength policymakers thought they had has been eroded. Participation has dipped, underemployment has risen, and new job creation is lagging behind population growth. Taken together, the revisions paint a picture of a job market that is not simply cooling but weakening in a way that raises real concerns about households, consumption, and confidence. In normal times, evidence of this sort would prompt the Fed to cut interest rates, offering support to workers and businesses before weakness hardens into recession.

But these are not normal times. Inflation, which the Fed spent much of 2022 and 2023 trying to wrestle down from four-decade highs, is showing signs of renewed strength. Consumer prices (CPI), wholesale prices (PPI), and the Fed’s preferred measure—the personal consumption expenditures (PCE) index—are all running hotter than expected. Each of these gauges tells a slightly different story: CPI reflects the prices households feel directly, PPI captures what businesses are paying before costs filter through, and PCE provides a broader picture of consumption patterns. Together, they suggest that price pressures are not abating. Tariffs explain part of the increase by raising the cost of imported goods, but they cannot explain all of it. Service prices remain elevated, rent and shelter costs are rising, and wages in many sectors have not kept up. For a central bank whose credibility depends on keeping inflation expectations anchored, it is an unsettling development. Cutting rates in such an environment risks allowing inflation to stabilize above 3 percent, an outcome inconsistent with the Fed’s stated 2 percent
target.

The Fed’s challenge is compounded by the structure of the modern US economy. When America was more heavily industrial, inflation could often be dampened by weakening demand for manufactured goods; reduced output by factories and dialed-back construction translated quickly into reduced spending and falling prices. Today, with services, finance, and healthcare comprising the bulk of American output, inflation behaves differently. Services are less sensitive to interest rates because they are tied more closely to demographics, wages, and expectations They are also typically contracted for, which locks in prices. Once wage-price dynamics take hold in a service-
driven economy, they can prove stubborn and self-reinforcing. This makes the Fed’s blunt tool of raising or lowering rates less effective and means Powell and his colleagues are navigating with far less visibility than their predecessors.

Layered onto this economic conundrum is a profound political one. The Trump administration has made no secret of its view that rates should be lower, and repeated public statements on Chairman Powell are designed to push monetary policy in that direction. Yet the Fed’s credibility depends on independence. If the Fed delivers a rate cut in September, critics may claim they caved to political jawboning. If they resist and
hold rates steady, there is a risk of deepening the perception that the central bank is indifferent to beleaguered household finances and the plight of workers. This is a delicate balancing act: either path exposes the Fed to accusations of failure, either as politically malleable or detached from US citizens’ economic realities. Powell’s speech at Jackson Hole in late August reflected this careful line-walking—acknowledging the weakness in jobs data while stopping short of promising an easing cycle.

The political overlay is not new. History offers several examples of clashes between presidents and the Fed. Lyndon Johnson famously hauled Fed Chair William McChesney Martin to his Texas ranch in the 1960s to pressure him against raising rates. Richard Nixon leaned heavily on Arthur Burns in the early 1970s to ensure easy money heading into reelection, a decision many historians believe contributed to the high inflation that followed. More recently, Trump’s attacks on Powell in 2018 and 2019 were unusually public, raising concerns that the Fed might bow to political heat. These episodes matter because the Fed’s independence is not just a domestic principle—it
underpins the global credibility of the US dollar. If the world’s reserve currency is thought to be a hostage of short-term politics, the consequences will extend far beyond Washington.

There is also the matter of government debt. The United States now carries more than $37 trillion in public debt, a sum that has ballooned in the past decade and accelerated further in recent years. At current interest rates, debt service is consuming a historically high share of federal revenues—already rivaling what the government spends on defense and Medicare. Because short-term rates dictate how much the Treasury pays to roll over its obligations, every quarter-point move by the Fed translates into tens of billions of dollars in interest expenses. While the Fed is not supposed to consider fiscal sustainability in its deliberations, markets (and the Fed itself) know this pressure exists. Cutting rates would ease the government’s burden; holding rates high would magnify it. This creates an unspoken but very real source of bias in favor of easing.

Markets themselves are caught in the crossfire. Secured Overnight Financing Rate (SOFR) futures, which reflect where traders expect short-term rates to be, currently imply an 85 percent probability of a September rate cut. Investors appear convinced that the Fed will lean toward supporting employment, at least in the near term. Equity markets, long accustomed to liquidity support, remain sensitive to the prospect of relief. Yet bond traders are less convinced, seeing limited room for Treasuries to rally so long as inflation remains above target. The misalignment between market expectations and Fed signaling is itself a source of volatility: to disappoint markets risks a sharp sell-off, while to validate them risks fueling another upward surge of prices. Fed signaling is itself a source of volatility: to disappoint markets risks a sharp sell-off, while to validate them risks fueling another upward surge of prices.

This is not the first time the Fed has faced such a dilemma. In the 1970s, policymakers were reluctant to impose the pain required to bring inflation under control, leading to a toxic mix of rising unemployment, rising prices, and lackluster growth known as stagflation. Only under Paul Volcker in the early 1980s did the Fed finally break the cycle, raising rates dramatically despite the deep recession that followed. That episode left scars but also restored the Fed’s credibility for decades. Today’s Fed faces a milder but still serious version of the same trap: if it cuts too soon, inflation and inflation expectations may drift higher, requiring harsher medicine later. If it waits too long to cut, continuing labor market weakness could erupt into a full-blown recession.

It is worth underscoring how unusual this moment is. In 2008–09, the Fed faced a clear deflationary collapse in the wake of a financial crisis; the choice to ease aggressively was straightforward. In 2020, the pandemic shock produced both a supply and demand collapse, and emergency liquidity was the only option. Today, however, the signals point in opposite directions: a softening labor market that would almost certainly benefit from support against inflation that requires monetary tightness to suppress. This is why the Fed’s current position is less about making the “right” choice and more about navigating between two dangers, each with serious consequences.

All of this adds up to a climate of profound uncertainty. The Fed has two clear objectives but cannot meet both simultaneously. The economy is sending conflicting signals, politics are muddying the waters, and fiscal realities are exerting quiet but immense pressure. For households and investors, the result is an environment where clarity is low and risks are elevated.

Historically, periods like this have driven interest in hard assets. Gold and silver, in particular, tend to thrive on uncertainty. Unlike fiat currencies, which can be devalued byinflation or manipulated by policy, hard assets offer relative permanence. They do not pay dividends or coupons, but they preserve purchasing power when confidence in central banks falters. During the stagflationary 1970s, gold prices surged more than tenfold as investors sought refuge from policy missteps. Even in the early 2000s, amid fiscal strain and geopolitical shocks, precious metals rallied while financial assets wavered. More recently, in the aftermath of the pandemic, gold and silver again gained ground as investors grappled with massive fiscal deficits, unconventional monetary policies, and unprecedented pandemic decrees.

The case for hard assets is not limited to gold. Silver, often dubbed “poor man’s gold,” tends to be more volatile but can outperform in periods of monetary uncertainty. Other tangible assets—from land and physical commodities to, more recently, digital assets like Bitcoin—are often viewed through the same lens: as hedges against policy failure and currency debasement. The common thread is independence. Hard assets are not
promises to pay, reliant on the solvency of an issuer or the credibility of a central bank. They exist outside of the financial system, and in moments when confidence in that system wavers, they gain appeal.

The Fed’s current predicament is best described not as a policy choice but as a policy trap. Any move they make will have costs, and the room for error is vanishingly small. For investors, that does not mean abandoning financial assets, but it does mean recognizing the limits of central banking and financial markets. The Scylla of unemployment and the Charybdis of inflation face the Fed, and navigating between them will take years, not months. Until then, gold, silver, and other hard assets—ancient in origin, but timeless in utility—remain among the very few anchors in uncertain waters.

 

About the author: Peter C. Earle, Ph.D, is the Director of Economics and Economic Freedom and a Senior Research Fellow who joined AIER in 2018. He holds a Ph.D in Economics from l’Universite d’Angers, an MA in Applied Economics from American University, an MBA (Finance), and a BS in Engineering from the United States Military Academy at West Point.

Prior to joining AIER, Dr. Earle spent over 20 years as a trader and analyst at a number of securities firms and hedge funds in the New York metropolitan area as well as engaging in extensive consulting within the cryptocurrency and gaming sectors. His research focuses on financial markets, monetary policy, macroeconomic forecasting, and problems in economic measurement. He has been quoted by the Wall Street Journal, the Financial Times, Barron’s, Bloomberg, Reuters, CNBC, Grant’s Interest Rate Observer, NPR, and in numerous other media outlets and publications.

 

Disclaimer: All opinions expressed by the author are the author’s opinions and do not reflect the opinions of Goldco. The author’s opinions are based on the author’s personal experience, education and information the author considers reliable. Goldco does not warrant that the information contained herein is complete or accurate, and it should not be relied upon as such.