Understanding US Fed's Dual Mandate Dilemma: Balancing Inflation and Jobs Amid Rising Challenges

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The US Federal Reserve, the central bank of the United States, cut interest rates by 25 basis points on September 17, 2025, bringing the target range to 4-4.25 percent. This move comes at a time when both inflation and unemployment are going up together, making it hard for the Fed to meet its two main goals of keeping prices stable and ensuring as many people as possible have jobs. Fed Chair Jerome Powell shared his thoughts in a press meet, pointing out the tough choices ahead, especially with political pressure from US President Donald Trump. This situation is important for India because US policies affect global trade, oil prices, and the value of the Indian rupee.

Key Points

1. The Fed's dual mandate means it must aim for low inflation (around 2 percent) and high employment, but right now, both goals are clashing as inflation rises and jobs weaken.
2. On September 17, 2025, the Fed lowered rates by 0.25 percent, with one member voting for a bigger 0.5 percent cut, showing split views on how to handle risks.
3. Unemployment in the US is at 4.3 percent, which is low but rising, and job creation numbers were revised down by over 900,000 for the period from April 2024 to March 2025.
4. Inflation has started going up again since April 2025, after falling earlier, making it tricky to cut rates without pushing prices higher.
5. President Trump has been pushing for lower rates and even fired a Fed governor, Lisa Cook, though courts put her back, raising worries about the Fed's freedom from politics.
6. The Fed's Summary of Economic Projections shows growth might pick up a bit, but 10 out of 19 members expect two more rate cuts in 2025, while nine think no more are needed.
7. The US economy makes up about 25 percent of the world economy, so its policies affect everyone, including India, where lower US rates could weaken the dollar and help Indian exports.
8. Some experts say the dual mandate, set in 1977, might need a rethink because it leads to tough choices that can slow down the economy in the long run.
9. The Fed is watching risks on both sides and says there is no easy path without risks, like causing high inflation or more job losses.
10. For India, this could mean better capital flows as US rates drop, but also higher global oil prices if inflation stays up, affecting India's import bills which are over $200 billion yearly for oil.

Explained

What Is the US Fed's Dual Mandate?

Definition and Goals:

The dual mandate is a rule for the US Federal Reserve to keep prices stable at around 2 percent inflation and ensure as many people as possible have jobs, known as maximum employment.

Historical Background:

This came from a 1977 law after high job losses in the 1970s due to oil price shocks, making the Fed care about both prices and jobs, unlike many other central banks that focus only on prices.

How It Works:

The Fed uses tools like changing interest rates to balance these goals; low rates help jobs by making loans cheap, but high rates control prices by slowing spending.

Why Is There a Conundrum Now?

Current Economic Indicators:

Inflation is rising since early 2025, while unemployment is up to 4.3 percent and job growth is slower than thought, with big downward changes in data.

Challenges in Balancing:

Usually, high inflation comes with good jobs, or bad jobs with low inflation, but now both problems are happening together, making it hard to cut rates without risks.

Political Factors:

Pressure from leaders like Trump for quicker cuts adds tension, and actions like trying to remove a Fed member question if the Fed can decide freely.

What Are the Tools and Recent Actions of the Fed?

Interest Rate Adjustments:

On September 17, 2025, the Fed cut rates by 25 basis points as a careful step, with plans for maybe two more cuts, to protect jobs without letting prices rise too much.

Economic Projections:

The Fed's report shows small improvements in growth outlook, but members are split on future cuts, focusing on risks to both jobs and prices.

Quotes from Powell:

He called it a "risk management" move, saying there is no easy path, and the Fed must act based on current data, not wait for perfect info.

What Are the Implications for India?

Stock Market Response:

Indian markets rose after the cut, with Sensex up over 400 points and Nifty gaining, mainly from IT sector buys, as lower US rates make India more attractive.

Sectoral Impacts:

IT firms like Infosys benefit from better US spending, while banking and real estate could see more foreign money inflows if rates fall more.

Broader Economic Effects:

A weaker US dollar could help Indian exports to the US, worth $80 billion yearly, and bring in more investments, but rising global oil prices from US inflation could increase India's oil import bill of over $200 billion.

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