Does the Fed care more about unemployment or inflation

The Federal Reserve, which operates under a dual mandate of price stability and maximum employment, appears to be tilting its focus back toward inflation after a period in which employment concerns had taken precedence, according to analysts at UBS Global Research.

UBS economist Arend Kapteyn found that the weight the Fed attributed to unemployment in setting policy had converged with, and marginally exceeded, its weight on inflation heading into early 2026, but that a stagflationary shock “emanating from the Middle East” is now shifting the balance back.

“Our impression is that the emphasis is shifting back a bit towards inflation, but confirmation will have to wait for the June Summary of Economic Projections,” Kapteyn said.

The analysis examined how changes in the Fed’s dot plot, the Federal Open Market Committee’s projection for the appropriate policy rate, responded to revisions in its own inflation and unemployment forecasts through rolling 10-quarter regressions of Summary of Economic Projections data.

The coefficients tracked the relative weight the Fed placed on each side of its mandate over time.

During the post-pandemic inflation surge, the Fed’s priority was unambiguously inflation control, a stance made easier by a labor market at or near full employment, which allowed tightening without breaching the employment side of the mandate.

As that inflation episode faded, the Fed grew increasingly concerned about a weakening labor market, and the unemployment coefficient in the rolling regression rose while the inflation coefficient fell.

By early 2026, the two coefficients had converged, with the unemployment weighting sitting marginally above the inflation weighting, suggesting a broadly balanced Fed, neither decisively hawkish nor dovish in its mandate priorities.

The chart tracking the evolution of FOMC weighting from the third quarter of 2024 through the first quarter of 2026 shows the unemployment coefficient rising from near zero to above one, while the inflation coefficient fell from roughly two toward the same range. The lines crossed sometime in 2025 before settling into near-parity.

The methodology used is straightforward: if inflation projections rise while unemployment forecasts remain unchanged, yet the median funds rate projection does not move, that would indicate the Fed is placing less weight on inflation risks and leaning more dovish. The reverse would signal a hawkish tilt.

Kapteyn noted the stagflation scenario now facing the Fed is distinctly harder to navigate than the post-pandemic period, when strong growth gave policymakers room to tighten aggressively.

A simultaneous rise in inflation and unemployment would force a direct tradeoff between the two sides of the mandate, a situation the Fed largely avoided during its 2022-2023 tightening cycle.

The June SEP will be the first formal test of how the FOMC resolves that tradeoff in its published projections.