Stagflation and the presidential election could put the Federal Reserve in a difficult position at this week's Federal Open Market Operations Committee (FOMC) meeting.

According to various recent economic reports, the U.S. economy is presenting a mixed picture, with both increased inflation and weaker economic growth. One example is the CPI, which has accelerated for the second month in a row, with an annual rate of 3.5% in March 2021, up from 3.2% in February. This reading is the highest rate since September, indicating a rise in inflation.

Then there is the March Producer Price Index (PPI), which rose at an annual rate of 2.1% in March 2024, up from 1.6% in February and 1% in January, the most gain since April 2023.

And there's the PCE inflation, which rose 2.7% in March 2024 from 2.5% in February. It's the highest reading in four months.

At the same time, economic growth has slowed significantly in the last couple of quarters, with the first-quarter growth coming down. The Gross Domestic Product (GDP) -- a measure of the nation's output during a calendar year--expanded by an annualized 1.6% in the first quarter of 2024. It's down from 3.4% in the previous quarter, the second consecutive slowdown since the contractions in the first half of 2022.

"The Fed is getting mixed messages as it heads into its next meeting," Jacob Channel, Senior Economist at Lending Tree, told International Business Times. "On the one hand, the most recent PCE report (the Fed's preferred measure of inflation) shows that price growth is still elevated above target levels. On the other hand, the latest GDP figures show that economic growth has slowed considerably since Q4 of last year."

The current scenario of increased inflation and reduced economic growth indicates a potential path towards stagflation for the U.S economy. While this situation may not be that severe yet, it presents a challenge for the Federal Reserve as they need to possess the necessary tools to tackle both high inflation and economic stagnation concurrently.

Conventional and unconventional monetary policies can tackle only one issue at a time, either weak economic growth or high inflation, but not both. Therefore, the Federal Open Market Committee (FOMC) will have a difficult decision in its upcoming meeting: whether to adopt a hawkish or a dovish approach.

The upcoming presidential elections will add to the FOMC's dilemma. According to a long-held tradition, the nation's central bank refrains from major policy changes ahead of this major political event to remain impartial.

Thus, the most likely outcome of this week's FOMC meeting is another pause, leaving the Federal Funds Rate (FFR) unchanged at the current 5.25%-5.50% level.

This outcome is also consistent with the CME's FedWatch Tool, which calculates the probability of changes in this critical interest rate for the nation's monetary policy. This time, it points to a 97.6% probability of FFR remaining in the current range, up from 94.6% a week ago and 90.7% a month ago.

The same tool points to a high probability (88.9%) that the Fed will keep interest rates at the current level in the June meeting and a 68.7% probability of doing the same in the July meeting. However, the chances of keeping the rates unchanged drop for the September, November, and December meetings, with the chances of 25-basis-point cuts gaining traction.

"Cuts in interest rates may be on the horizon, but as the Federal Reserve continues to proceed with caution, they may not drop rates until July or even later," Bryan Johnson, CFO of CDValet.com and Chartered Financial Analyst told IBT.

"Given recent inflation data, there is a strong consensus that policy will remain restrictive until inflation abates," added Jack Macdowell, Co-Founder, Managing Member, and Chief Investment Officer at Palisades Group. "The market has already priced rates higher for longer. However, any comments referencing the potential for another hike would likely lead to a rate selloff."

But Angelo Kourkafas is a Senior Investment Strategist of Edwards Jones, believes recent inflation data do not support the Fed's previous narrative of three rate cuts:

"The brisk pace of price gains in March does not instill the confidence the Fed was hoping to have by this time, when the last "dot plot" showed three rate cuts for the year."

Nonetheless, Kourkafas does not think the bar is high for the Fed to consider rate hikes again.

"Our base-case scenario remains that inflation will slow in the months ahead, allowing the Fed to start trimming rates, possibly two times (September and December)," he elaborated. "After three consecutive upside inflation surprises, investors are now extrapolating the same trend forward, but an eventual softening in rents and a deceleration in wage growth could once again shift the narrative. "

Mark J. Higgins, CFA, CFP of Index Fund Advisers, believes that it takes negative economic growth to achieve price stability.

"If the Fed means what they say -- and I believe their words indicate that they do -- financial history strongly suggests that growth will turn negative before price stability returns," he stated. "The reality is that sometimes you must cause pain to convince people that you mean what you say. And this is one of those cases."