It appears that the Federal Reserve, which operates under a dual mandate of price stability and maximum employment, is shifting its focus back toward inflation after a period when employment concerns were given greater priority.
UBS economist Arend Kapteyn found that the weight the Federal Reserve assigned to unemployment in guiding policy had converged with—and slightly exceeded—its weight on inflation at the start of 2026. However, a stagflationary shock “originating from the Middle East” is now rebalancing that dynamic.
Kapteyn stated: “Our impression is that the focus is shifting slightly back toward inflation, but confirmation will have to wait until the June Summary of Economic Projections.”
The analysis examined how changes in the Federal Reserve’s dot plot—representing the Federal Open Market Committee’s projections for the appropriate policy rate—responded to revisions in its own forecasts for inflation and unemployment. This was done using rolling 10-quarter regressions based on data from the Summary of Economic Projections.
The coefficients tracked the relative weight the Federal Reserve placed on each side of its mandate over time.
During the post-pandemic inflation surge, the Federal Reserve’s priority was clearly controlling inflation. This stance was made easier by a labor market at or near full employment, allowing policymakers to tighten without violating the employment side of the mandate.
As inflationary pressures eased, the Federal Reserve became increasingly concerned about labor market weakness. The unemployment coefficient in the rolling regression rose, while the inflation coefficient declined.
By early 2026, the two coefficients had converged, with unemployment slightly outweighing inflation—suggesting a broadly balanced Federal Reserve, neither clearly hawkish nor dovish in its mandate priorities.
The chart tracking the evolution of FOMC weightings from Q3 2024 to Q1 2026 shows the unemployment coefficient rising from near zero to above one, while the inflation coefficient declined from around two toward a similar range. The lines crossed sometime in 2025 before stabilizing at near parity.
The methodology is straightforward: if inflation expectations rise while unemployment expectations remain unchanged, yet the median policy rate projection does not move, this implies the Federal Reserve is placing less weight on inflation risks and is leaning more dovish. The opposite would indicate a more hawkish stance.
Kapteyn noted that the stagflation scenario now facing the Federal Reserve is clearly more difficult to navigate than the post-pandemic period, when strong growth gave policymakers room to tighten aggressively.
A simultaneous rise in inflation and unemployment forces a direct trade-off between the two sides of the mandate—a situation the Federal Reserve largely avoided during the 2022–2023 tightening cycle.
The June Summary of Economic Projections will be the first formal test of how the FOMC resolves this trade-off in its published outlook.
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