Pity the Fed: Its enormous economic powers are overshadowed only by the exaggerated public perceptions of those powers. The public expects the Fed to calibrate inflation and to spur economic growth with but one simple instrument, the overnight federal funds rate.

Many financial analysts expect that the Federal Reserve Board will “pause” interest rate increases later this month because of signs of a slowing economy and only moderate inflation. These expectations are good hunches, but they are not based on precise measures of either economic growth or inflation.

Of course, inflation depends on much more than just the federal funds rate. While all capital markets are at least indirectly affected by the federal funds rates, interest rates – from corporate bonds to home mortgages – depend on many factors beyond the Fed’s control. Commodity prices and housing prices are at or near historic highs, regardless of Fed actions this month or last. Decisions made in Tehran and Beijing may influence many prices in America as much if not more than decisions taken by the Fed.

The Fed’s influence on economic growth is even more tenuous. Recent Fed chairmen have taken to lecturing Congress and the administration about budget deficits, tax policy, and even regulation. The lectures are not the artifacts of frustrated academics, but the good counsel of economic advisers who understand the various factors that influence economic growth even more than the federal funds rate.

Even if there were a way to know precisely the effect of Fed policy on inflation and economic growth, setting the federal funds rate is far more than just a computer program to optimize economic growth without unleashing excessive inflation. If setting interest rates were best done by a simple algorithm, there would be little need for a Board of Governors, much less a staff of economists. The Fed is run by individuals because monetary policy is judgmental, if for no other reason than there are no unambiguous measures of either economic growth or inflation.

Consider measuring economic growth. No single measure captures all aspects of economic growth in the past, much less in the future. The Nobel laureate Robert Solow 50 years ago described the difference between indexes of economic growth as a “measure of our ignorance.” We are not much wiser today.

Just last Friday, the Department of Labor released estimates of May employment with 75,000 more workers than in April, and it revised downward its March and April employment estimates by 37,000. But market forecasters had predicted that the Labor Department would find approximately 150,000 more workers in May than in April without any downward revisions. Actual employment in May was not lower because of the Labor Department announcement; only economists’ measures – and the Fed’s measure – of economic activity declined.

The uncertainty associated with measures of recent economic activity is small compared with the uncertainty associated with forecasts of future economic activity. Estimates of U.S. economic growth in 2007 have a wide variation. The Fed has a large and competent staff of economists trying better to understand economic growth in America, but it would be unrealistic to believe that the Fed knows exactly past and future economic growth, much less the precise effect of Fed decisions on economic growth rates.

If different economic growth rates are measurements of our ignorance, then perhaps different inflation rates are our ignorance of measurements. For decades, leading economists such as Jerry Hausman of MIT have demonstrated that standard government inflation measures overstate inflation. The measures don’t adequately account for consumer reactions to new prices, new product qualities, and entirely new products and services. Other analysts suggest that inflation is underestimated because increased commodity prices aren’t fully reflected in the indices. The differences between government series and more economically defensible measures of inflation are substantial.

The Fed is left with the Herculean challenges of calibrating inflation and spurring economic growth with a single interest rate that can influence but not determine either outcome. Success or failure depends on changes in inflation and economic growth, neither of which is precisely measured. Later this month, the Fed must decide what to do with the federal funds rate, a decision that will be based more on seasoned judgment than a few poorly measured factors.

A former FCC commissioner, Mr. Furchtgott-Roth is president of Furchtgott-Roth Economic Enterprises. He can be reached at hfr@furchtgott-roth.com.