The Fed Should Think in Terms of a Trilemma

After the Federal Reserve meets Nov. 1 and 2 this week, we may know more about how this Fed will be remembered: as a Volcker Fed that decisively conquered inflation or, instead, a Burns Fed that allowed the country to slip into a stagflationary quagmire. But this already complex reality is even more complicated. Fed Chair Jerome Powell faces a policy challenge that could well prove more challenging that that faced by his predecessors from the 1970s and 1980s: lowering inflation, sidestepping undue damage to the economy and livelihoods, and avoiding a financial accident in the process.

While the market consensus for this week’s Fed policy meeting is heavily in favor of a record fourth consecutive 75-basis-point interest rate hike, views diverge significantly on what the Fed should signal about its future moves. Some think the Fed should suggest a significant slowing of the pace of rate hikes in face of a weakening economy, both domestically and internationally. This, they say, would protect growth and save jobs.