Author: hubbardobrieneconomics

As Expected, the FOMC Keeps the Federal Funds Rate Target Unchanged

Photo of Fed Chair Jerome Powell from federalreserve.gov

Today’s meeting of the Federal Reserve’s policymaking Federal Open Market Committee (FOMC) had the expected result with the committee deciding to keep its target range for the federal funds rate unchanged at 3.50 percent to 3.75 percent. Fed Governors Stephen Miran and Christopher Waller voted against the action, preferring to lower the target range for the federal funds rate by 0.25 percentage point or 25 basis points.

The following figure shows for the period since January 2010, the upper limit (the blue line) and the lower limit (the green line) for the FOMC’s target range for the federal funds rate, as well as the actual values for the federal funds rate (the red line). Note that the Fed has been successful in keeping the value of the federal funds rate in its target range. (We discuss the monetary policy tools the FOMC uses to maintain the federal funds rate within its target range in Macroeconomics, Chapter 15, Section 15.2 (Economics, Chapter 25, Section 25.2).)

Powell’s press conference following the meeting was his first opportunity to discuss the Department of Justice having served the Federal Reserve with grand jury subpoenas, which indicted that Powell might face a criminal indictment related to his testimony before the Senate Banking Committee in June concerning expenditures on renovating Federal Reserve buildings in Washington DC. It was also his first opportunity to discuss his attendance at the Supreme Court during oral arguments in the case that Fed Governor Lisa Cook brought attempting to block President Trump’s attempt to remove her from the Fed’s Board of Governors.

Powell stated that he had attended the Supreme Court hearing because he believed the case to be the most important in the Fed’s history. He noted that there was a precedent for his attendance in that Fed Chair Paul Volcker had attended a Supreme Court during his term. Powell declined to say anything further with respect to the Department of Justice subpoenas or with respect to whether he would stay on the Board of Governors after his term as chair ends in May. (Powell’s term as chair ends on May 15; his term as a Fed governor ends on January 31, 2028.)

With respect to the economy, Powell stated that he saw the risks to the two parts of the Fed’s dual mandate for price stability and maximum employment to be roughly balanced. Although inflation continues to be above the Fed’s annual target of 2 percent, committee members believe that inflation is elevated because of one-time price increases resulting from tariffs. The committee’s staff economists believe that most of the effects of tariffs on the price level were likely to have passed through the economy sometime in the middle of the year.

Powell noted that the economy had surprised the committee with its strength and that the outlook for further growth in output was good. He noted that there continued to be signs of slight weakening of the labor market. In particular, he cited increases in the broadest measure of the unemployment rate released by the Bureau of Labor Statistics (BLS).

The following figure shows the U-6 measure of the unemployment rate (the blue bars). This measure differs from the more familiar (U-3) measure of the unemployment rate (the red bars) in that it includes people who are working part time for economic reasons and people who are marginally attached to the labor force. The BLS counts people as marginally attached to the labor force if they “indicate that they have searched for work during the prior 12 months (or since their last job if it ended within the last 12 months), but not in the most recent 4 weeks. Because they did not actively search for work in the last 4 weeks, they are not classified as unemployed [according to the U-3 measure].” Between June 2025 and December 2025, the U-3 meaure of unemployment increased by 0.3 percentage point, while the U-6 measure increased by 0.7 percentage point.

When asked whether he had advice for his successor as Fed chair, Powell said the Fed chairs should not get pulled into commenting on elective politics and should earn their democratic legitimacy through their interactions with Congress.

Looking forward, Powell repeated the sentiment included in the committee’s statement that: “In assessing the appropriate stance of monetary policy, the Committee will continue to monitor the implications of incoming information for the economic outlook. The Committee would be prepared to adjust the stance of monetary policy as appropriate if risks emerge that could impede the attainment of the Committee’s goals.”

The next FOMC meeting is on March 17–18. One indication of expectations of future changes in the FOMC’s target for the federal funds rate comes from investors who buy and sell federal funds futures contracts. (We discuss the futures market for federal funds in this blog post.)

As of this afternoon, investors assigned a 86.5 percent probability to the committee keeping its target range for the federal funds rate unchanged at 3.50 percent to 3.75 percent at its March meeting. That expectation reflects the view that a solid majority of the committee believes, as Powell indicated in today’s press conference, that the unemployment rate is unlikely to rise significantly in coming months, while the inflation rate is likely to decline as the effects of the tariff increases finish passing through the economy.

PCE Inflation Remains Steady While Real Personal Consumption Spending Rises

Image created by ChatGPT

On January 22, the Bureau of Economic Analysis (BEA) released monthly data on the personal consumption expenditures (PCE) price index and on real personal consumption spending for October and November as part of its “Personal Income and Outlays” report. Because of the federal government shutdown, two months of data were released together with some of the price data for October being imputed because the Bureau of Labor Statistics was unable to collect some consumer price data in that month. The release of data for December has been delayed.

The following figure shows headline PCE inflation (the blue line) and core PCE inflation (the red line)—which excludes energy and food prices—with inflation measured as the percentage change in the PCE from the same month in the previous year. In November, headline PCE inflation was 2.8 percent, up slightly from 2.7 percent in October. Core PCE inflation in November was also 2.8 percent, up slightly from 2.7 percent in November. Both headline and core PCE inflation for November were equal to the forecast of economists surveyed by the Wall Street Journal.

The following figure shows headline PCE inflation and core PCE inflation calculated by compounding the current month’s rate over an entire year. (The figure above shows what is sometimes called 12-month inflation, while the figure below shows 1-month inflation.) Measured this way, headline PCE inflation increased from 1.9 percent in October to 2.5 percent in November. Core PCE inflation declined from 2.5 percent in October to 1.9 percent in November. So, both 1-month and 12-month PCE inflation are telling the same story of inflation somewhat above the Fed’s target. The usual caution applies that 1-month inflation figures are volatile (as can be seen in the figure).

Fed Chair Jerome Powell has frequently mentioned that inflation in non-market services can skew PCE inflation. Non-market services are services whose prices the BEA imputes rather than measures directly. For instance, the BEA assumes that prices of financial services—such as brokerage fees—vary with the prices of financial assets. So that if stock prices rise, the prices of financial services included in the PCE price index also rise. Powell has argued that these imputed prices “don’t really tell us much about … tightness in the economy. They don’t really reflect that.” The following figure shows 12-month headline inflation (the blue line) and 12-month core inflation (the red line) for market-based PCE. (The BEA explains the market-based PCE measure here.)

Headline market-based PCE inflation was 2.5 percent in November, up slightly from 2.4 percent in October. Core market-based PCE inflation was 2.4 percent in November, down slightly from 2.5 percent in October. So, both market-based measures show inflation as stable but above the Fed’s 2 percent target.

In the following figure, we look at 1-month inflation using these measures. One-month headline market-based inflation increased to 2.1 percent in November from 1.3 percent in October. One-month core market-based inflation fell to 1.3 percent in November from 2.0 percent in October. So, in November, 1-month market-based inflation was at or below the Fed’s annual inflation target. As the figure shows, the 1-month inflation rates are more volatile than the 12-month rates, which is why the Fed relies on the 12-month rates when gauging how close it is coming to hitting its target inflation rate.

Data on real personal consumption expenditures were also included in this report. The following figure shows compound annual rates of growth of real personal consumptions expenditures for each month since January 2023. Measured this way, the growth in real personal consumptions expenditures rebounded from 1.3 percent in September to 3.7 percent in both October and October and November.

Strong growth in real personal consumption is consistent with the strong growth in real GDP in the third quarter of 2025 shown in the following figure, which reflects revised data that the BEA released yesterday. Real GDP grew at a compound annual rate of 3.8 percent in October and 4.4 percent in November. indicating a strong rebound in output growth following a 0.6 percent decrease in real GDP in the first quarter of 2025.

Is it likely that real GDP continued its strong growth in the fourth quarter of 2025? Economists at the Federal Reserve Bank of Atlanta prepare nowcasts of real GDP. A nowcast is a forecast that incorporates all the information available on a certain date about the components of spending that are included in GDP. The Atlanta Fed calls its nowcast GDPNow. As the following figure from the Atlanta Fed website shows, today the GDPNow estimate—taking into account this week’s macroeconomic data—is that real GDP grew at an annual rate of 5.4 percent in the fourth quarter of 2025.

These data confirm the widely-held view among economists and investors that the Federal Reserve’s policy-making Federal Open Market committee will keep its target for the federal funds rate unchanged at is next meeting on January 27–28.

Solved Problem: The Effect of a Cap on Credit Card Interest Rates

Supports: Macroeconomics Chapter 4, Section 4.3, and Chapter 14, Section 14.3 and Economics, Chapter 4, Section 4.3, and Chapter 24, Section 24.3.

Image created by ChatGPT

Credit cards provide two main services: 1) They are more convenient to use than cash and are more widely accepted than are personal checks, and 2) they are a source of short-term credit. People who pay their balances off at the end of each month get (very short-term) credit for free. People who don’t pay their balances off have to pay interest on the unpaid balance. Credit cards are the leading source of short-term credit to small businesses. We can think of the interest rate on credit card balances as the price of credit card services, although people who pay off their balances each month avoid paying this price. (Note that banks and other credit card issuers also earn fees from merchants who accept credit cards. These processing fees are usually between 1.5 percent and 3.5 percent of the price of the transaction.)

President Trump announced that he intends to cap the interest rate on credit cards at 10 percent. (Imposing such a cap is usually thought to require Congressional approval.) Currently, the average interest rate on credit cards is about 21 percent, although interest rates vary across cards due to differences in the awards the cards give to card holders and the credit history of the card holders.

In this problem, we look at the effect of capping credit card interest rates on the market for credit card services. An interest rate cap is effectively a price ceiling, so we can use the analysis in Chapter 4, Section 4.4, “Government Intervention in the Market: Price Floors and Price Ceilings” to analyze the effect of the interest rate cap on the market for credit card services.  We briefly discuss the effects of a cap on credit card interest rates in the Apply the Concept “Help for Young Borrowers: Fintech or Ceilings on Interest Rates?” in Chapter 14, Section 14.3.

  1. Use a demand and supply graph to illustrate the effect of a cap on credit card interest rates on the market for credit card services. Be sure that your graph shows the equilibrium price (interest rate) and quantity of credit card services before and after the imposition of the cap. Briefly explain why you would expect the demand curve for credit card services to be downward sloping and the supply curve for credit card services to be upward sloping.
  2. Which groups would you expect to be most affected and which would you expect to be least affected by the imposition of a cap on credit card interest rates?

Solving the Problem
Step 1: Review the chapter material. This problem is about the effect of an interest rate cap on the market for credit card services, so you may want to review Chapter 4, Section 4.4, “Government Intervention in the Market: Price Floors and Price Ceilings” and the Apply the Concept “Help for Young Borrowers: Fintech or Ceilings on Interest Rates?” in Chapter 14, Section 14.3.

Step 2: Answer part a. by drawing a demand and supply graph of the market for credit card services that illustrates the effect of an interest rate cap.  The following figure is simlar to Chapter 4, Figure 4.10, which shows the effect of rent control on the market for rental apartments. We can show the interest rate cap as a horizontal line at an interest rate of 10%. The inital equilibrium, before the imposition of a cap, is at an interest rate of 20 percent and a quantity of credit card services, Q1, where the demand curve for credit card services crosses the supply curve for credit card services. After imposition of the interest rate ceiling, the equilibrium interest falls to 10 percent and the equilibrium quantity of credit card services falls from Q1 to Q2.

We would expect that the higher the interest rate on credit card balances, the fewer the quantity of credit card services consumers will demand. Therefore, the demand curve for credit card services should be downward sloping. We would also expect that the higher the interest rate on credit card balances, the great the quantity of credit card services that banks and other credit card issuers will supply. Therefore, the supply curve for credit card services should be upward sloping.

Step 2: Answer part b. by discussing which groups you would expect to be most affected and which you would expect to be least affected by the imposition of a cap on credit card interest rates. The figure shows that after the imposition of an interest rate ceiling there is a shortage of credit card services equal to the quantity Q3 – Q2. Because Q2 is less than Q1, we know that some people who would have credit cards prior to the imposition of the interest rate ceiling will no longer be able to qualify for them. These people will be affected most by the interest rate cap. We would expect that people who have a higher risk of defaulting on their credit card balances would be most likely to be unable to obtain credit cards following the imposition of the interest rate cap because credit card issuers won’t be able to charge them an interest rate high enough to compensate the issuers for the higher risk of default. In addition, those people who are still able to receive credit cards and who typically don’t pay off their balance each month will benefit from the decline in the interest rate on unpaid balances from 20 percent to 10 percent.

The people who pay off their balances each month will be least affected because they weren’t paying interest. There are some complications, however. Credit card issuers may respond to the interest rate cap by reducing the rewards—such as cash back on their purchases or points toward buying airline tickets or hotel stays—that card holders receive for using their cards. Reducing rewards would affect even those people who pay off their balances each month.   

Extra credit: There has been a debate over how many people would be affected by the imposition of a cap on credit card interest rates. For example, Brian Shearer of Vanderbilt University argues that credit card issuers will only modestly reduce the number of people with weak credit histories who they will no longer be willing to issue credit cards to.  Paul Calem and Alexander Kim of the Bank Policy Institute, a banking industry trade group, argue that up to two-thirds of people who currently fail to pay off their credit card balances each month are likely to no longer qualify for credit cards or will qualify for credit cards will lower dollar limits following the imposition of a credit card cap.

Overall CPI Inflation Is Steady While Inflation in Grocery and Restaurant Prices Increases

Image created by ChatGPT

This morning (January 13), the Bureau of Labor Statistics (BLS) released its report on the consumer price index (CPI) for December. The following figure compares headline CPI inflation (the blue line) and core CPI inflation (the red line). Because of the effects of the federal government shutdown, the BLS didn’t report inflation rates for October or November, so both lines show gaps for those months.

  • The headline inflation rate, which is measured by the percentage change in the CPI from the same month in the previous year, was 2.7 percent in December.. 
  • The core inflation rate, which excludes the prices of food and energy, was 2.6 percent in December. 

Headline inflation was the same as economists surveyed by FactSet had forecast, while core inflation was slightly lower.

In the following figure, we look at the 1-month inflation rate for headline and core inflation—that is the annual inflation rate calculated by compounding the current month’s rate over an entire year. We switch from lines to bars to make the December inflation rates easier to see.

Calculated as the 1-month inflation rate, headline inflation (the blue line) was 3.8 percent in December, the same as in September which is the most recent month with data. Core inflation (the red line) was up slightly to 2.9 percent in December from 2.8 percent in September.

The 1-month and 12-month inflation rates are telling similar stories, with both measures indicating that the rate of price increase is running moderately above the Fed’s 2 percent inflation target.

Of course, it’s important not to overinterpret the data from a single month. The figure shows that the 1-month inflation rate is particularly volatile. Also note that the Fed uses the personal consumption expenditures (PCE) price index, rather than the CPI, to evaluate whether it is hitting its 2 percent annual inflation target.

In recent months, there have been many media reports on how consumers are concerned about declining affordability. These concerns are thought to have contributed to Zohran Mamdani’s victory in New York City mayoral race. Affordability has no exact interpretation but typically means concern about inflation in goods and services that consumers buy frequently.

Many consumers seem worried about inflation in food prices. The following figure shows 1-month inflation in the CPI category “food at home” (the blue bar)—primarily food purchased at groceries stores—and the category “food away from home” (the red bar)—primarily food purchased at restaurants. Both measures increased rapidly in December. Food at home increased 9.0 percent in December, up from 4.0 percent in September. Food away from home increased 8.7 percent in December, up from 1.7 percent in September. Again, 1-month inflation rates can be volatile, but these large increases in food prices in December may help explain the recent focus on affordability.

The news on changes in the price of gasoline was better for consumers. The following figure shows 1-month inflation in gasoline prices. In December, the price of gasoline fell by 5.3 percent after a very large 41.9 percent in November. As those values imply, 1-month inflation rates in gasoline are quite volatile.

The affordability discussion has also focused on the cost of housing. The price of shelter in the CPI, as explained here, includes both rent paid for an apartment or a house and “owners’ equivalent rent of residences (OER),” which is an estimate of what a house (or apartment) would rent for if the owner were renting it out. OER is included in the CPI to account for the value of the services an owner receives from living in an apartment or house. The following figure shows 1-month inflation in shelter.

One-month inflation in shelter jumped in December to 5.0 percent from 2.5 percent in September, although it was down from 5.4 percent in August.

Overall, then, inflation in food and shelter was high in December, although gasoline prices fell in that month.

This CPI report is unlikely to affect the action the Federal Reserve’s policymaking Federal Open Market Committee (FOMC) may take at its next meeting on January 27–28. Investors who buy and sell federal funds futures contracts assign a very high probability to the FOMC leaving its target for the federal funds rate unchanged at that meeting as well as at its meeting on March 17–18. Investors don’t expect the committee to cut its target range for the federal funds rate until its June 16–17 meeting. (We discuss the futures market for federal funds in this blog post.)

By the time of the FOMC’s June meeting, the committee will have several additional months’ data on inflation, employment, and output. Jerome Powell’s term as Fed chair will end on May 15, so presumably the FOMC will have a new chair at that meeting. (This blog post from yesterday includes Powell’s response to the news that he is under investigation by the U.S. Department of Justice and a statement by Glenn and other economists who have served in government objecting to the investigation because they believe that it will undermine the independence of the Fed. We discuss the issue of Fed independence in Macroeconomics, Chapter 17 (Economics, Chapter 27) and Money, Banking, and the Financial System, Chapter 13.)

Statement on the Federal Reserve Signed by Glenn and other Economists Who Have Served in Government

Statement on the Federal Reserve

The Federal Reserve’s independence and the public’s perception of that independence are critical for economic performance, including achieving the goals Congress has set for the Federal Reserve of stable prices, maximum employment, and moderate long-term interest rates. The reported criminal inquiry into Federal Reserve Chair Jay Powell is an unprecedented attempt to use prosecutorial attacks to undermine that independence. This is how monetary policy is made in emerging markets with weak institutions, with highly negative consequences for inflation and the functioning of their economies more broadly. It has no place in the United States whose greatest strength is the rule of law, which is at the foundation of our economic success.

SIGNATORIES

Ben S. Bernanke served two terms as Chair of the Board of Governors of the Fed, as well as Chair of the Council of Economic Advisers under President George W. Bush.

Jared Bernstein served as Chair of the Council of Economic Advisers under President Joe Biden.

Jason Furman served as Chair of the Council of Economic Advisers under President Barack Obama.

Timothy F. Geithner served as the 75th Secretary of the Treasury under President Barack Obama, as well as President and Chief Executive Officer of the Federal Reserve Bank of New York.

Alan Greenspan served five terms as Chair of the Board of Governors of the Fed, first appointed by President Ronald Reagan and then reappointed by Presidents George H.W. Bush, Bill Clinton, and George W. Bush. He also was Chair of the Council of Economic Advisers under President Gerald Ford.

Glenn Hubbard served as Chair of the Council of Economic Advisers under President George W. Bush.

Jacob J. Lew served as the 76th Secretary of the Treasury under President Barack Obama.

N. Gregory Mankiw served as Chair of the Council of Economic Advisers under President George W. Bush.

Henry M. Paulson served as the 74th Secretary of the Treasury under President George W. Bush.

Kenneth Rogoff is the Maurits C. Boas Professor of International Economics at Harvard University and former chief economist of the International Monetary Fund.

Christina Romer served as Chair of the Council of Economic Advisers under President Barack Obama.

Robert E. Rubin served as the 70th Secretary of the Treasury under President Bill Clinton, after serving as the first director of the White House National Economic Council.

Janet Yellen served as the 78th Secretary of the Treasury under President Joe Biden, Chair and Vice Chair of the Board of Governors of the Fed, Chair of the Council of Economic Advisers under President Bill Clinton, and President and CEO of the Federal Reserve Bank of San Francisco.

*********************

Separately, Federal Reserve Chair Jerome Powell issued the following statement last night. (Here is a link to Powell’s statement and to a video of Powell reading the statement.)

Good evening.

On Friday, the Department of Justice served the Federal Reserve with grand jury subpoenas, threatening a criminal indictment related to my testimony before the Senate Banking Committee last June. That testimony concerned in part a multi-year project to renovate historic Federal Reserve office buildings.

I have deep respect for the rule of law and for accountability in our democracy. No one—certainly not the chair of the Federal Reserve—is above the law. But this unprecedented action should be seen in the broader context of the administration’s threats and ongoing pressure.

This new threat is not about my testimony last June or about the renovation of the Federal Reserve buildings. It is not about Congress’s oversight role; the Fed through testimony and other public disclosures made every effort to keep Congress informed about the renovation project. Those are pretexts. The threat of criminal charges is a consequence of the Federal Reserve setting interest rates based on our best assessment of what will serve the public, rather than following the preferences of the President.

This is about whether the Fed will be able to continue to set interest rates based on evidence and economic conditions—or whether instead monetary policy will be directed by political pressure or intimidation.

I have served at the Federal Reserve under four administrations, Republicans and Democrats alike. In every case, I have carried out my duties without political fear or favor, focused solely on our mandate of price stability and maximum employment. Public service sometimes requires standing firm in the face of threats. I will continue to do the job the Senate confirmed me to do, with integrity and a commitment to serving the American people.

Thank you.

December Jobs Report Shows Employment Up and the Unemployment Rate Down

Image generated by ChatGPT

This morning (January 9), the Bureau of Labor Statistics (BLS) released its “Employment Situation” report (often called the “jobs report”) for December. Both the increase in employment and the unemployment rate were lower than had been expected. 

The jobs report has two estimates of the change in employment during the month: one estimate from the establishment survey, often referred to as the payroll survey, and one from the household survey. As we discuss in Macroeconomics, Chapter 9, Section 9.1 (Economics, Chapter 19, Section 19.1), many economists and Federal Reserve policymakers believe that employment data from the establishment survey provide a more accurate indicator of the state of the labor market than do the household survey’s employment data and unemployment data. (The groups included in the employment estimates from the two surveys are somewhat different, as we discuss in this post.)

According to the establishment survey, there was a net increase of 50,000 nonfarm jobs during December. This increase was below the increase of 75,000 net new jobs that economists surveyed by FactSet had forecast.  Economists surveyed by the Wall Street Journal had forecast an increase of 71,000 jobs. In addition, the BLS revised downward its previous estimates of employment in October and November by a combined 76,000 jobs. (The BLS notes that: “Monthly revisions result from additional reports received from businesses and government agencies since the last published estimates and from the recalculation of seasonal factors.”)

During 2025, the U.S. economy experienced an average monthly net increase of 49,000 jobs, down from an average monthly net increase of 168,000 jobs during 2024.

The following figure from the jobs report shows the net change in nonfarm payroll employment for each month in the last two years. The figure illustrates that monthly job growth has moved erratically since April. The Trump administration announced sharp increases in U.S. tariffs on April 2. Media reports indicate that some firms have slowed hiring due to the effects of the tariffs or in anticipation of those effects.

The unemployment rate decreased from 4.5 percent in November to 4.4 percent in December. The unemployment rate is below the 4.5 percent rate economists surveyed by FactSet had forecast. As the following figure shows, the unemployment rate had been remarkably stable over the past year, staying between 4.0 percent and 4.2 percent in each month May 2024 to July 2025 before breaking out of that range in August. Not that the gap in the figure for October reflects the fact that the federal government shutdown resulted in the BLS not conducting a household survey in that month.

Each month, the Federal Reserve Bank of Atlanta estimates how many net new jobs are required to keep the unemployment rate stable. Given a slowing in the growth of the working-age population due to the aging of the U.S. population and a sharp decline in immigration, the Atlanta Fed currently estimates that the economy would have to create 113,487 net new jobs each month to keep the unemployment rate stable at 4.4 percent. If this estimate is accurate, continuing monthly net job increases of only 50,000 would result in a rising unemployment rate.

As the following figure shows, the monthly net change in jobs from the household survey moves much more erratically than does the monthly net change in jobs from the establishment survey. As measured by the household survey, there was a net increase of 232,000 jobs in December. (There is no employment estimate from the household survey for October or November.) As an indication of the volatility in the employment changes in the household survey note the very large swings in net new jobs in January and February. In any particular month, the story told by the two surveys can be inconsistent, as was the case this month with employment increasing much more in the household survey than in the employment survey. (In this blog post, we discuss the differences between the employment estimates in the two surveys.)

The household survey has another important labor market indicator: the employment-population ratio for prime age workers—those aged 25 to 54. In December the ratio rose to 80.7 percent from 80.6 percent in November. The prime-age employment-population ratio is somewhat below the high of 80.9 percent in mid-2024, but is still above what the ratio was in any month during the period from January 2008 to February 2020. The increase in the prime-age employment-population ratio is a particular bright spot in this month’s jobs report.

The following figure shows monthly net changes in federal government employment as measured by the establishment survey. Following the very large net decrease of 179,000 federal government jobs in October, the data for the last two months were more typical of the changes in earlier years with a net increase of 3,000 federal jobs in November and 2,000 jobs in December. In these two months, changes to federal employment had only a small effect on the overall labor market.

The establishment survey also includes data on average hourly earnings (AHE). As we noted in this post, many economists and policymakers believe the employment cost index (ECI) is a better measure of wage pressures in the economy than is the AHE. The AHE does have the important advantage of being available monthly, whereas the ECI is only available quarterly. The following figure shows the percentage change in the AHE from the same month in the previous year. The AHE increased 3.8 percent in December, up from an increase of 3.6 percent in November.

The following figure shows wage inflation calculated by compounding the current month’s rate over an entire year. (The figure above shows what is sometimes called 12-month wage inflation, whereas this figure shows 1-month wage inflation.) One-month wage inflation is much more volatile than 12-month wage inflation—note the very large swings in 1-month wage inflation in April and May 2020 during the business closures caused by the Covid pandemic. In December, the 1-month rate of wage inflation was 4.0 percent, up from 3.0 percent in November. Both the 1-month and the 12-month data for average hourly earnings show that wage growth remains fairly strong.

What effect might today’s jobs report have on the decisions of the Federal Reserve’s policymaking Federal Open Market Committee (FOMC) with respect to setting its target for the federal funds rate? One indication of expectations of future changes in the FOMC’s target for the federal funds rate comes from investors who buy and sell federal funds futures contracts. (We discuss the futures market for federal funds in this blog post.) In recent weeks, investors have expected that the FOMC would leave its target for the federal funds rate unchanged at its next meeting on January 27–28.  This afternoon, as the following figure shows, investors raised the probability they assign to the committee leaving its target for the federal funds rate unchanged to 95.0 percent from 88.9 percent yesterday. The relatively strong jobs report combined with measures of inflation remaining above the Fed’s 2 percent annual target, makes it likely that the committee will wait to receive additional data on employment, inflation, and GDP before adjusting its federal funds rate target.

Real GDP Growth in the Third Quarter Comes in Well Above Forecasts

Image created by ChatGTP

This morning (December 23), the Bureau of Economic Analysis (BEA) released its initial estimate of real GDP for the third quarter of 2025. (The report can be found here.) The BEA estimates that real GDP increased in the third quarter by 4.3 percent measured at an annual rate. Economists surveyed by FactSet had forecast a 3.2 percent increase. Real GDP experienced strong growth for the second quarter in a row, following an estimated 0.6 percent decline in the first quarter of 2025. The following figure shows the estimated rates of GDP growth in each quarter beginning with the first quarter of 2021.

As the following figure—taken from the BEA report—shows, the growth in consumer spending in the third quarter was the most important factor contributing to the increase in real GDP. Increases in net exports and in government spending also contributed to GDP growth, while investment spending declined.

To better gauge the state of the economy, policymakers often prefer to strip out the effects of imports, inventory investment, and government purchases—which can be volatile—by looking at real final sales to private domestic purchasers, which includes only spending by U.S. households and firms on domestic production. As the following figure shows, real final sales to domestic purchasers increased by 3.0 percent at an annual rate in the third quarter, which was below the 4.3 percent increase in real GDP but still well above the U.S. economy’s expected long-run annual growth rate of 1.8 percent. Note also that real final sales to private domestic purchasers grew by 1.9 percent in the first quarter, during which real GDP declined. So this measure of output indicates solid growth during the first three quarters of the year.

The BEA report this morning included quarterly data on the personal consumption expenditures (PCE) price index. The Fed relies on annual changes in the PCE price index to evaluate whether it’s meeting its 2 percent annual inflation target. The following figure shows headline PCE inflation (the blue line) and core PCE inflation (the red line)—which excludes energy and food prices—for the period since the first quarter of 2019, with inflation measured as the percentage change in the PCE from the same quarter in the previous year. In the third quarter, headline PCE inflation was 2.7 percent, up from 2.4 percent in the second quarter. Core PCE inflation in the third quarter was 2.9 percent, up from 2.7 percent in the second quarter. Both headline PCE inflation and core PCE inflation remained well above the Fed’s 2 percent annual inflation target.

The following figure shows quarterly PCE inflation and quarterly core PCE inflation calculated by compounding the current quarter’s rate over an entire year. Measured this way, headline PCE inflation increased to 2.8 percent in the third quarter of 2025, up from to 2.1 percent in the second quarter. Core PCE inflation increased to 2.9 percent in the third quarter of 2025 from 2.6 percent in the second quarter. Measured this way, both core and headline PCE inflation were well above the Fed’s target.

The relatively strong growth and above-target inflation data from today’s report contrast with last week’s mixed but somewhat weak employment data (which we discuss here) and CPI data that showed inflation significantly slowing (which we discuss here). Note, though, that the employment data were affected by the unusually large decline in federal government employment and the CPI report relied on incomplete data. And, of course, both the employment and GDP data are subject to revision.

In guiding monetary policy, the Federal Reserve’s policymaking Federal Open Market Committee (FOMC) will look for further indications as to whether today’s data showing strong real GDP growth and inflation stuck above the Fed’s target or last week’s data showing both employment growth and inflation slowing are giving a more accurate picture of the state of economy. The FOMC meets next on January 27–28.