The Federal Reserve Open Market Committee cut interest rates by a quarter percentage point at its Wednesday meeting, the first rate cut this year, out of concern over the U.S. economy’s stalled job market. Declines in both the number of people looking for jobs and the number gaining employment have “certainly gotten everyone’s attention,” Federal Reserve Chairman Jerome Powell said afterward.

The federal funds rate — the interest rate that other lenders pay to the Federal Reserve — now moves to a target range between 4% and 4.25%, down from a target range between 4.25% and 4.5%.

Despite a nearly unanimous decision, Federal Reserve officials expressed a low degree of confidence that they made the right decision. Economic signals show both rising inflation and weakening employment, two signs that point monetary policy in opposite directions. “It’s not incredibly obvious what to do,” Powell admitted. “There’s no risk-free path.”

Dual Mandate

This perplexing situation stems from the somewhat contradictory aims of the “dual mandate” (which is really a triple mandate) established for the Federal Reserve in legislative statute. In the Federal Reserve Reform Act of 1977 (12 U.S.C. §225a), Congress assigned to the Fed “the goals of maximum employment, stable prices, and moderate long-term interest rates.”

Maximum employment means the lowest sustainable rate of unemployment (with a target around 4%), while stable prices means low inflation (with a target around 2%). In practice, interest rates are not so much a goal as the instrument by which the Fed tries to balance its other two mandates.

And it is a balancing act. According to economic theory (which has usually been borne out by events), higher inflation and employment (and thus low unemployment) both correspond to an expanding economy, while lower inflation and higher unemployment correspond to a contracting economy. Raising the interest rate has the effect of slowing an economy’s expansion, while lowering the interest rate has the effect of speeding it up.

Federal Reserve Responsibilities

Yet the Federal Reserve does far more than monitor and modify monetary policy. The Federal Open Market Committee (FOMC) only considers changes to the interest rate at its eight meetings interspersed throughout the year. In addition to the FOMC, the Federal Reserve also consists of a D.C. agency and 12 reserve banks, each responsible for a certain district of the country.

The Federal Reserve agency promulgates banking regulations as dictated by Congress, and then its various branches oversee banks in their districts to ensure compliance. The Federal Reserve also acts as a sort of “bank for banks,” lending money, processing checks between banks, and generally smoothing the process of handling financial transactions around the country.

The “federal funds rate” that the FOMC sets is the interest rate it charges to banks on overnight loans, which then affects the interest rates that banks themselves set, trickling throughout the economy. This is why the interest rates available to an individual consumer, such as on a mortgage, will always be somewhat higher than the interest rate set by the Federal Reserve.

Additionally, each Federal Reserve bank conducts research on economic conditions in its district. Some banks specialize in specific topics, such as the New York Reserve Bank, which specializes in understanding Wall Street, and the St. Louis Reserve Bank, which maintains the Federal Reserve Economic Database (FRED), often the largest and most accessible source of economic data over time.

The Federal Reserve is also responsible for managing the physical supply of U.S. currency in circulation. (The total money supply is controlled through interest rates because a significant proportion of the money in circulation is based on credit; the physical supply of currency is far smaller than the number of dollars that hypothetically exist.) This involves printing money, which — imprecise suggestions to the contrary notwithstanding — usually serves to replace worn or damaged bills, rather than contributing directly to inflation.

Thus, the Federal Reserve regulates banks (at least some types), supervises them, and provides them with banking services. It also manages the money supply, sets interest rates, and conducts extensive economic research. In response to the financial crisis of 2007-2009, the Dodd-Frank Act assigned yet another responsibility to the Federal Reserve, tasking it with a “macroprudential” role in financial risk management. This essentially means that it is the Fed’s job to notice any red flags in the financial sector and try to head them off before they become a problem.

Incidentally, any plan to abolish the Federal Reserve over its failures on monetary policy would have to devise a plan to reassign its other functions to other agencies or do without them. A far simpler reform would simply be to change the Federal Reserve’s mandate to focus solely on controlling inflation and leave it to Congress to address any rising unemployment.

Divided Committee

Of course, the most popularly recognizable aspect of the Federal Reserve system is the Federal Open Market Committee’s periodic meetings, at which, among other agenda items, it determines interest rates. As the most consequential meetings by the highest decision-makers, these draw the most media attention.

These have also generated friction with the Trump administration, which has repeatedly pressured Federal Reserve Board chairman Jerome Powell to lower interest rates dramatically.

Of course, Powell cannot change interest rates unilaterally. The FOMC has 12 voting members at any one time, including the seven members of the Federal Reserve Board, the president of the Federal Reserve Bank of New York, and the presidents of four of the other 11 federal reserve banks in rotation (the other seven bank presidents still participate in meetings, making for a total of 19.)

On a quarter-point rate cut in September, the FOMC was nearly unanimous. The only dissenter was Stephen Miran, who advocated a half-point rate cut instead. He was recently nominated by President Trump and only confirmed by the Senate on Monday night, hours before the FOMC meeting began.

Miran took a leave of absence from his job running the White House Council of Economic Advisors for a position on the Federal Reserve Board, filling out the remainder of a vacant term that expires in February (after which he plans to return to the White House). “Of course, he won’t have a Trump White House job to come back to unless he pushes the president’s agenda at the Fed,” argued National Review’s Andrew McCarthy.

However, Federal Reserve officials are more narrowly divided over the need for further rate cuts. Seven out of 19 meeting participants projected no more rate cuts this year (at the FOMC’s October and December meetings), two more projected only one rate cut, and seven members projected rate cuts at both remaining meetings this year. This suggests that, unless economic factors change, swaying the officials in one direction or another, the votes on future interest rate cuts this year will be close affairs, and may come down to which officials are voting at any given meeting.

With contradictory economic signals confusing their instruments, and a dangerous gale issuing from 1600 Pennsylvania Avenue, the Federal Reserve Open Market Committee is lost at sea, uncertain of their position or direction, and everyone wants to be the captain.