The Fed’s confidence is cracking and everyone can see it

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There are moments when an institution reveals how difficult its job has become. The Federal Reserve, which usually provides a steady anchor for global finance, has recently shown the strain of operating in an economy that no longer behaves like the one its models were built for. This is not a story of failure. It is a story of a central bank being stretched by a mandate that asks it to do more than any comparable institution in the world.

Source: Advisor Perspectives

The path of US interest rates since 2020 captures the complexity. A collapse to zero during the pandemic. A tightening cycle executed at speed once inflation surged. A later retreat as growth softened. These moves reflect a central bank responding to a rapidly shifting environment, not one improvising without purpose. But they do show how difficult it is to maintain a consistent narrative when the signals are contradictory.

Inside the Fed, those contradictions show up as widening disagreement.

Source: Wall Street Journal

Under normal conditions, some dispersion of views is healthy. It reflects independent judgement. The current spread, however, highlights something deeper. Policymakers are working with inflation indicators that remain above target and employment indicators that are beginning to weaken. When the data point in different directions, the policy debate becomes more fragmented. This is not incompetence. It is the natural consequence of a mandate that pulls decision-makers towards two objectives at once.

The United States is unusual in expecting its central bank to deliver both price stability and what it calls “maximum employment”. The dual mandate is admirable in its intention but difficult in practice, especially in periods of structural change. “Maximum employment” is not a number the Fed can point to. It is an evolving judgement about how much job creation the economy can sustain without re-igniting inflation. In an economy shaped by technology, demographic shifts and global supply shocks, that judgement becomes harder, and disagreement inside the committee is inevitable.

Inflation dynamics have shifted, labour markets have been reshaped by technology and demographic transitions, and supply chains are still adjusting after years of disruption. Asking a single policy rate to balance all of this is extraordinarily demanding.

This tension is what economists like John Cochrane, a Stanford-based macroeconomist and long-time critic of expansive central bank mandates, have warned about. A broad mandate makes a central bank more exposed to political interpretation because almost any policy choice can be framed as favouring one objective over another. The point is not that the Fed is political. It is that its mandate can make it appear political in the eyes of those who want to see it that way. Narrower objectives would offer greater protection, not less.

The world around the Fed makes the challenge more acute. China is expanding energy and industrial capacity at a scale that shifts global pricing power. The United States is adjusting more slowly, and inflation behaves differently as a result.

Traditional relationships between output, employment and prices no longer hold with the same reliability. A central bank designed for the world of the 1990s now operates in an economy shaped by data centres, AI investment, energy constraints and supply fragmentation.

Source: Semafor

Mohamed El-Erian, the former PIMCO chief executive and now a widely followed global macro commentator, has warned that this mismatch creates uncertainty not because the Fed lacks competence but because the framework it inherited no longer fits the economy it faces. Internal debate, therefore, is a rational response to a world in which the old reference points have weakened.

Source: Financial Times

This is why today’s signals matter. Not because the Fed is failing, but because the institution is being forced to make difficult judgements under a mandate that was designed for a simpler economic landscape. When the world changes, the tools and objectives need updating too.

The question is not whether the Fed should cut or hold. It is whether the structure guiding its decisions gives it the clarity it needs to operate with full confidence. The charts show how quickly the landscape has shifted. A mandate that once made sense is now being stretched to its limits.

Reform would not weaken the Federal Reserve. It would strengthen it. By clarifying its objectives, simplifying what it is accountable for and reducing the room for political misinterpretation, the Fed would regain something essential: the ability to tell a clear and credible story about the economy it is trying to steer.