Federal Reserve Chair Jerome Powell doesn't use words carelessly. So when he described the current U.S. economy as "very unusual" following the December FOMC meeting, investors should pay attention. The phrase captures a central bank caught between conflicting data points, uncertain about its next moves.

Understanding what makes this economy "unusual" is crucial for positioning portfolios in 2026.

The Paradox Explained

Powell outlined the unusual nature of current conditions:

Inflation remains elevated: At 3%, inflation is persistently above the Fed's 2% target. It's solidly in the "sticky" category, proving resistant to the rate hikes that began in 2022.

But inflation isn't demand-driven: Here's the unusual part. Powell noted that most of the remaining inflation overshoot comes from goods categories directly affected by tariffs—not from domestic economic overheating. "Inflation excluding tariff-affected goods is in the low [2%]," he said.

The labor market is weakening: Behind headline employment numbers, job creation may already be negative. Powell admitted the Fed believes official payroll figures are overstating job growth by roughly 60,000 positions.

The Policy Bind

This combination creates a challenging policy environment:

Traditional playbook says: Keep rates elevated when inflation exceeds target.

But: If inflation is primarily tariff-driven rather than demand-driven, higher rates won't solve it—they'll only slow the economy and worsen the labor market.

Alternative playbook says: Cut rates to support employment when the job market weakens.

But: Cutting rates while inflation remains at 3% risks appearing to abandon the inflation mandate, potentially destabilizing inflation expectations.

Powell's "very unusual" label reflects this bind. The standard recession/inflation playbooks don't fit neatly.

Internal Fed Dissent

The December meeting revealed significant disagreement within the FOMC:

  • Three outright dissents: The most at a policy meeting since 2019
  • Six "soft dissents": Officials who went along but expressed reservations
  • Core disagreement: How to weigh lingering inflation against possible job market weakness

This internal division explains Powell's cautious forward guidance. With the committee itself uncertain, bold policy signals would lack credibility.

The Data Gap Problem

Complicating matters: the Fed may be operating with incomplete information.

A White House official suggested that October jobs and inflation data lost during a government shutdown may never be released. Economic data released will be "permanently impaired," leaving policymakers "flying blind at a critical period."

If accurate, this data gap means the Fed's December decision relied on incomplete pictures of both inflation and employment—exactly the variables driving policy.

What This Means for Markets

Powell's unusual economy warning has several implications:

For Stocks

The good news: the Fed isn't likely to hike rates. The bad news: aggressive cuts that might fuel further equity gains aren't coming either. Expect the Fed to move slowly and cautiously, removing a potential bullish catalyst.

For Bonds

Yields may stay rangebound. Without clear direction on Fed policy, the 10-year Treasury could oscillate between 4.0% and 4.75% depending on economic data releases.

For Dollar

Currency markets dislike uncertainty. The dollar may face pressure if investors perceive the Fed as lacking conviction in its policy path.

For Gold

Policy uncertainty typically supports gold prices. The Fed's admission that standard models don't fit current conditions adds to safe-haven appeal.

Economic Scenarios for 2026

Given the uncertainties Powell outlined, several scenarios are plausible:

Soft landing (optimistic): Tariff-related inflation fades in second half of 2026, job market stabilizes, Fed cuts gradually. Stocks rise modestly.

Stagflation-lite (pessimistic): Inflation remains sticky, job market continues weakening. Fed faces impossible choice between supporting employment and fighting inflation. Volatility increases.

Policy pivot (wildcard): New Fed chair (expected after Powell's May 2026 term) takes dramatically different approach. Major policy uncertainty.

How to Invest in Uncertainty

When even the Fed chair calls conditions "very unusual," portfolio humility is warranted:

  1. Maintain diversification: Don't bet entirely on any single outcome
  2. Keep some powder dry: Cash and short-term bonds provide optionality
  3. Consider real assets: Gold, commodities, and TIPS hedge various inflation scenarios
  4. Quality over speculation: Companies with strong balance sheets weather uncertainty better
  5. Watch the data: Employment and inflation releases will move markets more than usual

The Bottom Line

Powell's "very unusual" characterization is rare candor from a Fed chair. It acknowledges that standard economic models may not capture current dynamics—and that policy could evolve in unexpected ways.

For investors, the message is clear: uncertainty is elevated, confidence should be moderated, and flexibility in positioning is valuable. The unusual economy Powell describes requires unusual investor humility.