The US Federal Reserve has two missions: keep inflation under control and have full employment.

What should be the desired rate of inflation? If it gets too low, that might be due to the economy stagnating and heading towards recession. Too high and people and businesses start hurting and indulging in more short-term spending as a hedge against future price rises. The magic number that the Fed and the economic pundits have settled on seems to be around 2%.

In its Statement on Longer-Run Goals and Monetary Policy Strategy (PDF), the Federal Open Market Committee (FOMC) judges that inflation of 2 percent over the longer run, as measured by the annual change in the price index for personal consumption expenditures, is most consistent with the Federal Reserve’s mandate for maximum employment and price stability. When households and businesses can reasonably expect inflation to remain low and stable, they are able to make sound decisions regarding saving, borrowing, and investment, which contribute to a well-functioning economy and the well-being of all Americans.

What ‘full employment’ means is a little trickier and hard to fix with a specific number. Why not make it so that the unemployment rate is zero? i.e., everyone who wants a job has one. But in a capitalist economy that favors the capitalist class, that is seen as undesirable because it puts too much bargaining power in the hands of workers, enabling them to bargain for higher wages. When on occasion one reads of employers saying that they cannot find workers, I interpret that as them saying that they cannot get people to work for the wages that the employers want to pay. If they offer higher wages, they can probably get as many workers as they need.

As a result, the Fed describes full employment as the highest level of employment the economy can sustain without causing inflation. i.e. without causing wages to rise beyond what they would like. While not officially specified, the target number for unemployment seems to be around 4%. The argument they give for this more modest meaning assigned to ‘full employment’ is that zero percent unemployment is it unrealistic because there will always be people who are unemployed temporarily due to transitioning between jobs or new people entering the job market. Maybe so, but 4% unemployment still seems rather high.

There is a third measure of economic health and that is the growth rate of the Gross Domestic Product but that is outside the the Fed’s mandate.

So if the inflation rate is 2% and the unemployment rate is 4%, the economy could be considered to be cruising along nicely and not requiring any action by the Fed. But that is rarely the case. The problem is that the main lever that the Fed has is interest rates and that single factor affects both inflation and unemployment in opposite ways. High interest rates tends to lower inflation but increase unemployment, because the cost of borrowing money goes up which means that businesses and individuals are less likely to hire people and borrow and spend to grow their businesses.

The problem is that inflation rates have remained stubbornly high and yesterdays’s numbers continued the trend.

Consumer prices climbed in August, partly driven by President Donald Trump’s tariffs, heightening the challenge for Federal Reserve officials who are also grappling with a stall in hiring that could derail economic growth.

The consumer price index rose at an annual rate of 2.9 percent, the fourth-straight month of acceleration, while a less volatile gauge that excludes food and energy costs remained stuck above 3 percent, according to a Labor Department report released Thursday.

In a separate report, Labor also said new jobless claims jumped to the highest level in nearly four years last week. Recent downward revisions to previously released jobs data indicate that payroll growth was much weaker than many had assumed through the spring and early summer.

The crosscurrents of higher inflation and a softening labor market pose a major headache for Jerome Powell as he navigates the final months of his term as Fed chair. While markets still expect the Fed to lower short-term borrowing costs at a meeting next week, moving too aggressively to cut rates could cause inflation to reaccelerate. But keeping rates too high will make it more difficult for employers to bring on more workers.

Adding to Powell’s headache is that Trump has been demanding that interest rates be cut because that move will give a boost the economy, raise stock prices, and increase hiring, thus making him look good. The effect of raising inflation rates will be down the road and since Trump thinks short term, he probably does not care.