Federal Reserve policymakers parent two unruly children — U.S. labor markets and consumer prices. To keep their country’s economic house in order, they craft an appropriate monetary policy balancing the needs of each, without letting either run amok.

History shows keeping the children well-behaved is more an art than a science. When they thought runaway consumer prices would prove “transitory” in 2021, pandemic-era inflation instead rose 9.1% over the year ending June 2022, prompting a punishing rate-hike campaign that brought inflation (mostly) home by 2025.

The Fed’s two-day policy meeting in the middle of September — which lowered the overnight lending rate for banks by 0.25% to a target range of 4% to 4.25% — confirmed what markets had begun to sense in the weeks preceding the meeting: The children were getting trickier to control.

“There are no risk-free paths now,” Chairman Jerome Powell told a roomful of reporters at the conclusion of that Federal Open Market Committee (FOMC) session. “We have to live life looking through the windshield and not the rear-view mirror,” he would go on to say. “The rate cut is part of a broader rate path.”

Minutes released Wednesday from last month’s FOMC meeting offer a glimpse in the rear-view mirror, however, and into the minds of central bankers tasked with crafting a monetary policy that returns the Fed’s dual mandate of maximum employment and stable consumer prices to a state of equilibrium that each mandate has steadily diverged from in 2025.

The Fed’s dual mandate

The Fed has a stated target of 2% for long-run inflation.

Inflation as measured by the personal consumption expenditures index, the Fed’s preferred measure of consumer prices, rose 0.3% from July and 2.9% year over year in August. The seasonally adjusted consumer price index, another common inflation gauge, rose in August at its fastest pace since January, with the 2.9% increase driven by rising housing and grocery costs.

The Fed also seeks to maintain “maximum employment,” which isn’t directly pinned to an unemployment rate, though 4% is often viewed as a general benchmark. The last government jobs report clocked unemployment at 4.3% in August. Unemployment has remained stable between 4% and 4.3% since July 2024, with a three-month trending average of 4.2% as of August, though months of weak job creation has markets on edge.

The minutes underscore genuine divisions between policymakers who feel that as each side of the dual mandate moves further from target baselines, the blunt impacts of the Fed’s key policy tool — raise rates, lower rates or keep rates steady — intensifies the margin of error of any shift in policy.

“Some participants noted that, by several measures, financial conditions suggested that monetary policy may not be particularly restrictive, which they judged as warranting a cautious approach in the consideration of future policy changes,” the minutes said. “Most judged that it likely would be appropriate to ease policy further over the remainder of this year.”

Though reducing the Fed’s overnight borrowing rate at which banks lend money to other banks can gradually lower borrowing costs for loans on cars, houses and business investments, spurring increased spending and hiring, the path to labor market stability through rate cuts is far from a straight shot — consumers must spend, firms must invest.

In the meantime, underadjustments or overadjustments risk fanning the flames of inflation or tipping stagnant job creation into full-on job losses. These concerns clearly occupied the minds of vacillating Fed policymakers last month.

“With regard to the outlook for inflation, participants generally expected that, given appropriate monetary policy, inflation would be somewhat elevated in the near term and would gradually return to 2% thereafter,” the minutes read.

Participants noted too that “if policy were eased too much or too soon and inflation continued to be elevated, then longer-term inflation expectations could become unanchored and make restoring price stability even more challenging. By contrast, if policy rates were kept too high for too long, then unemployment could rise unnecessarily, and the economy could slow sharply.”

Miran’s stance

The Fed announces policy on a consensus basis, and all but one policymaker approved of the decision to lower the fed funds rate by 0.25% in September. Stephen Miran, who secured a leave of absence from the White House Economic Council to fill a temporary seat on the Fed’s Board of Governors vacated by the early resignation of Adriana Kugler, was sworn in on the morning of the FOMC meeting. He voted for a 0.5% reduction.

The minutes describe Miran’s reasoning for a jumbo rate cut as driven by his view of “further softening in the labor market over the first half of the year and underlying inflation that in his view was meaningfully closer to 2% than was apparent in the data.”

Miran also “expressed the view that additional policy easing was also appropriate to reflect that the neutral rate of interest had fallen,” the minutes stated. He indicated this was “due to factors such as increased tariff revenues that had raised net national savings and changes in immigration policy that had reduced population growth.”

Softer dissents

The minutes ultimately reveal the range of policy perspectives Powell now has to manage.

“A few participants stated there was merit in keeping the federal funds rate unchanged at this meeting or that they could have supported such a decision,” the September minutes read.

“These participants noted that progress toward the committee’s 2% inflation objective had stalled this year,” they continued, “as inflation readings increased and expressed concern that longer-term inflation expectations may rise if inflation does not return to its objective in a timely manner.”

With the next two-day Fed policy meeting scheduled for Oct. 28 and 29, the pace of future easing depends on month-to-month changes in labor markets, consumer prices and overall economic growth.

A September jobs report — the Employment Situation Summary scheduled for release Oct. 3 but delayed by the U.S. Bureau of Labor Statistics — is the first data gap created by a U.S. government shutdown that commenced Oct. 1.