The Federal Reserve is navigating an economy as complex as anytime outside of a crisis.

Consumer spending is strong, but sentiment is weak. Bond yields are at their highest in decades, yet stocks have soared. The US has experienced an energy shock, yet growth is accelerating. Home prices remain high, but the housing market is gridlocked. Unemployment is at historically low levels — and a crackdown on immigration has curbed the flow of workers — but wage growth is slow. Inflation is slowing in some areas but resurgent in others. Fueling it all is a historic artificial intelligence boom that is either going to drive a productivity surge or spur massive job cuts.

The ambiguous signals are muddying the outlook for Fed policymakers, whose job is to support employment and control inflation — a role Chairman Kevin Warsh has likened to that of a referee.

It’s a crucial moment for an economy that has gone through a series of white-knuckle shocks this decade — and one that presents an unusual level of uncertainty for central bankers. Move too slowly and the Fed risks repeating its pandemic-era error, when it misread the worst inflation crisis in decades. Move too quickly and it risks hurting millions of businesses and households that are already vulnerable. On either side, its credibility may be at stake.

And making that call requires parsing an economy that seems headed in multiple directions at once — as well as staying on top of trends, like AI, that are nearly impossible to predict. Most concerning of all, some of the most important economic developments of 2026 appear potentially to be beyond the Fed’s control.

For now the bigger challenge is controlling inflation. Purists say the US central bank needs to jack up borrowing costs to a level that sucks inflation out of the system by slowing spending and demand. How many more rate hikes it would take to get to that level isn’t clear, but rates would probably need to land above the current federal funds rate range of 3.75%-4%. A Fed that is raising interest rates shows investors it is serious about controlling inflation, which itself would take the steam out of rising bond yields.

There’s a political angle too. The Fed’s move to raise rates in September — its first hike in three years — showed a determination to shake off pressure from the White House as President Donald Trump continues to call for lower borrowing costs. Trump has been searing in his criticism of the central bank and has revived attempts to dismiss Governor Lisa Cook over allegations of mortgage fraud. Further hikes signal independence. Others argue for caution.

Their argument goes that the pace of inflation is expected to slow sharply next year, especially when compared to the energy shock of 2026. Rising bond yields will have an impact on economic activity and higher borrowing costs would hurt lower-income workers and small businesses who are nursing variable-rate car loans or credit cards. Because it takes up to 18 months for monetary policy to have an impact, raising rates now risks creating bigger problems down the road.

The confusion sometimes plays out in speeches and remarks from Fed officials, with some arguing for urgent rate hikes while others don’t. The balance of signaling from policymakers ahead of this month’s interest-rate decision suggests they have time to assess the economy before deciding whether to hike again. Investors are betting the next move is likely in December. What is clear, however, is that inflation is still a problem.

Consumer and producer price data for September showed that prices are moving higher across the board as households and businesses pay more for goods and services. The Fed has missed its 2% inflation target for more than five years now.

Fed officials are still haunted by the pandemic era when they fell behind the curve after initially dubbing inflation “transitory.”Instead, it became the worst inflation outbreak in 40 years.

Since the end of 2019, groceries have risen by around 30%. Electricity costs in the same period have risen by 43%, while car insurance is almost 50% higher.

Geopolitics has added fuel to the fire, starting with Russia’s 2022 full-scale invasion of Ukraine and continuing with the Iran war. This year alone, diesel prices are around 70% higher and gasoline is up by around 50% since the latter began in February.

There are other pressures in the system too. Tariffs on goods remain at the highest level in decades. One example: Toy prices in September had their biggest annual increase since 1988. To be clear, the economy has seen periods of complexity before.

In 1980, then-Fed Chairman Paul Volcker was forced to raise interest rates to a record high of 20% to slow inflation that had hit 11.6%. In 2008, Warsh himself had a front-row seat as a Fed governor for the global financial crisis that threatened a new depression before policymakers put a floor under a collapsing financial system. In 2020, Covid-19 forced monetary policymakers to respond to a global pandemic unlike anything they’d experienced in their lifetimes.

Yet even by those standards, the current pace of change is unusual and the jigsaw of complexity is everywhere — and nowhere is that more evident than in AI, where skeptics question how much influence monetary policy can even have.

The AI surge is expected to ultimately lift productivity and keep a lid on inflation, but right now the unprecedented billions of dollars needed to build the infrastructure are driving up borrowing costs and the cost of computers. Apple Inc. in June raised prices for Macs, iPads, home devices and the Vision Pro headset to offset cost hikes caused by an unprecedented shortage of memory chips and storage.

Skeptics say the pace and scale of the buildout and the borrowing needed to fund it have all the hallmarks of a giant bubble. If that’s true, pricing pressures would eventually ease of their own accord when AI fervor inevitably cools.

While the massive levels of borrowing needed to fund the AI buildout will be impacted by rising interest rates, analysis by Barclays found that hyperscalers are spending more than 90% of their cash flow from operations on AI infrastructure, which means at least that portion of spending would be insulated from Fed rate hikes.

“The world, in my view, is changing faster than at any point in my adult life,” Warsh said this month during a moderated discussion at the International Monetary Fund’s annual meetings.

AI is not the only trend arguably outside the Fed’s control. There’s little that higher interest rates can do to bring down shipping costs through the Strait of Hormuz due to the Iran war or to clear the bottleneck of memory chips.

Ultimately, whether or not interest rates are the best tool to temper AI spending or respond to conflict in Hormuz, they’re the tool the Fed has on hand, and it will continue to use them until inflation is tamed. Close observers of the central bank warn it needs to act.

One of those is Maurice Obstfeld, a senior fellow at the Peterson Institute for International Economics, who likens the Fed’s inflation task to that of a doctor prescribing antibiotics.

Even as the symptoms pass, the patient will be urged to complete the course, said Obstfeld, a former chief economist at the IMF.

“You may feel better, but finish them,” Obstfeld said. The same course of action applies to the Fed. “When they start to hike, they continue administering the antibiotics for a while until the patient is cured.”