WASHINGTON (TNND) — Keeping the economy on track is becoming an increasingly tenuous task for the Federal Reserve with businesses slashing hiring leading to climbing unemployment rates while the U.S. has maintained steady growth after a rocky start to the year.
An economy going through a jobless expansion along with above-target inflation creates a delicate balancing act to keep the U.S. from tipping into a recession and harder for the Fed to judge whether to cut or raise rates.
Adding to the challenge in navigating a dicey economy was the six-week government shutdown that froze the collection and release of economic data officials use to guide their decisions. Data is starting to flow again with multiple new figures slated for release in the coming weeks, but the vital jobs report and consumer price index for October are likely to never be released, limiting officials’ insights of the economy to dated information.
The data the Fed does have is causing division inside the central bank and presenting a picture of an uneven and wobbly economy. Job growth beat expectations last month but has cratered overall in 2025 with losses in June and August, while unemployment climbed to 4.4%.
Even with a stalling labor market, the economy has maintained a solid pace of growth thanks to gains in worker productivity. After a small contraction in the first quarter, gross domestic product — which captures all goods and services produced in the economy — grew 3.8% in the second quarter. An estimate of third-quarter growth by the Federal Reserve Bank of Atlanta projects a robust 4.2% for the July to September period.
Fed officials have already taken notice of the disconnect between economic growth and reduced hiring.
“Many participants observed that the divergence between solid economic growth and weak job creation created a particularly challenging environment for policy decisions,” according to minutes from the Fed’s October meeting.
Much of the economy’s growth is being driven by a tech boom through massive investments in artificial intelligence that have also spurred questions about whether another bubble is forming. Other types of business investments have fallen flat amid uncertainty about trade policy from the White House and concerns about a global slowdown due to trade tensions.
The question for the Fed is how and whether officials can move short-term rates to keep the labor market from deteriorating any further, which would be certain to lead to a massive pullback in consumer spending that powers the American economy.
“What they’re really thinking about is wanting to head off a decline in consumer consumption. You could say the economy’s been driven more by this AI boom and massive investments. But long term, if that were to slow, consumption is declining,” said Mark Williams, a finance lecturer at Boston University’s Questrom School of Business and former bank examiner at the Federal Reserve.
Ahead of this week’s data influx, markets were getting increasingly optimistic about another Fed cut at its December meeting.
As of Monday afternoon, the odds of another quarter-point cut jumped to more than 77%, compared to less than 30% before the weekend, according to the CME FedWatch tool. The Fed’s latest economic projections also forecast more cuts in 2026 in their projections from September.
Consumers, especially in low- and middle-income households, are being squeezed from several directions in the current economy. Though layoffs have been relatively limited and provided some job security, it is more challenging for people out of work to find a new job and the gap between the pace of wage growth and inflation has shrunk, harming their ability to keep up with the steady flow of price increases over the last several years.
Fed officials have been divided over whether to cut rates again next month with inflation hawks pointing to steady growth despite the current rates as evidence they can afford to wait, while those in favor of a cut see a job market in desperate need of saving. Arguments on both sides of the cuts have been made during speeches in recent weeks.
But a Friday speech from New York Fed president John Williams appears to have changed investors’ outlook on December after he said labor market weakness poses a bigger threat than inflation.
Inflation has been above the Fed’s target of 2% for nearly three years and is showing no immediate signs of easing. Data from September, the most recent month available, showed prices increased 3% at an annual rate.
“Bond markets are anticipating inflation is going to be with us for longer and higher, so that should slow consumer spending as consumers have not only less in their wallet, but obviously they have to spread it out in what they can consume,” Williams said. “Reduction in consumption and an increase in job losses should slow the economy down, even with a decline in interest rates.”
Tariffs add another element of uncertainty to future prices with questions about when and how much businesses will pass their added costs onto their customers.
The tariffs have not caused the massive spikes to inflation that were initially feared and companies were able to stock up on goods ahead of the levies going into effect to blunt their impacts, but Fed officials and economists are still trying to find signs that prices will not continue to climb.