Supports: Macroeconomics, Chapter 9,Economics, Chapter 19, and Essentials of Economics, Chapter 13.
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A recent article on axios.com notes that from April 2023 to July 2024, the U.S. economy generated an average net increase of 177,000 jobs per month. Despite that job growth, the unemployment rate during that period increased by 0.8 percentage point. The article observes that: “At first glance, the combination of a rising unemployment rate and strong jobs growth simply does not compute.” How is it possible during a given period for both total employment and the unemployment rate to increase?
Solving the Problem Step 1: Review the chapter material. This problem is about calculating the unemployment rate, so you may want to review Chapter 9, Section 9.1, “Measuring the Unemployment Rate, the Labor Force Participation Rate, and the Employment-Population Ratio.”
Step 2: Answer the question by explaining how it’s possible for both the total number of people employed and the unemployment rate to both increase during the same period. The unemployment rate is equal to the number of people unemployed divided by the number of people in the labor force (multiplied by 100). The labor force equals the sum of the number of people employed and the number of people unemployed.
Let’s consider the situation in a particular month. Suppose that the unemployment rate in the previous month was 4 percent. If, during the current month, both the number of people employed and the number of people unemployed increase, the unemployment rate will increase if the increase in the number of people unemployed as a percentage of the increase in the labor force is greater than 4 percent. The unemployment rate will decrease if the increase in the number of people unemployed as a percentage of the increase in the labor force is less than 4 percent.
Consider a simple numerical example. Suppose that in the previous month there were 96 people employed and 4 people unemployed. In that case, the unemployment rate was (4/(96 + 4)) x 100 = 4.0%.
Suppose that during the month the number of people employed increases by 30 and the number of people unemployed increases by 1. In that case, there are now 126 people employed and 5 people unemployed. The unemployment rate will have fallen from 4.0% to (5/(126 + 5)) x 100 = 3.8%.
Now suppose that the number of people employed increased by 30 and the number of people unemployed increases by 3. The unemployment will have risen from 4.0% to (7/(126 + 7)) x 100 = 5.3%.
We can conclude that if both the total number of people employed and the total number of people unemployed increase during a during a period of time, it’s possible for the unemployment rate to also increase.
In today’s episode, Glenn Hubbard and Tony O’Brien take on three timely topics that are shaping economic conversations across the country. They begin with a discussion on tariffs, exploring how recent trade policies are influencing prices, production decisions, and global relationships. From there, they turn to the independence of the Federal Reserve Bank, explaining why central bank autonomy is essential for sound monetary policy and what risks arise when political pressures creep in. Finally, they shed light on the Bureau of Labor Statistics (BLS), unpacking how its data collection and reporting play a vital role in guiding both public understanding and policymaking.
It’s a lively and informative conversation that brings clarity to complex issues—and it’s perfect for students, instructors, and anyone interested in how economics connects to the real world.
Fed Chair Jerome Powell (left) and Vice Chair Philip Jefferson (photo from federalreserve.gov)
Today (August 12), the Bureau of Labor Statistics (BLS) released its report on the consumer price index (CPI) for July. The following figure compares headline CPI inflation (the blue line) and core CPI inflation (the red line).
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 July, unchanged from June.
The core inflation rate,which excludes the prices of food and energy, was 3.0 percent in July, up slightly from 2.9 percent in June. (Note that there was some inconsistency in how the core inflation rate is reported. The BLS, and some news outlets, give the value as 3.1 percent. The unrounded value is 3.0486 percent.)
Headline inflation and core inflation were slightly lower than what economists surveyed had expected.
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. Calculated as the 1-month inflation rate, headline inflation (the blue line) declined from 3.5 percent in June to 2.4 percent in July. Core inflation (the red line) increased from 2.8 percent in June to 3.9 percent in July.
The 1-month and 12-month inflation rates are telling somewhat different stories, with 12-month inflation indicating that inflation is stable, although moderately above the Fed’s 2 percent inflation target. The 1-month core inflation rate indicates that inflation may have increased during July.
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.
A key reason for core inflation being significantly higher than headline inflation is that gasoline prices declined by 23.1 percent at an annual rate in June. As shown in the following figure, 1-month inflation in gasoline prices moves erratically—which is the main reason that gasoline prices aren’t included in core inflation.
Does the increase in inflation represent the effects of the increases in tariffs that the Trump administration announced on April 2? (Note that many of the tariff increases announced on April 2 have since been reduced) The following figure shows 12-month inflation in three categories of products whose prices are thought to be particularly vulnerable to the effects of tariffs: apparel (the blue line), toys (the red line), and motor vehicles (the green line). To make recent changes clearer, we look only at the months since January 2021. In July, prices of apparel fell, while the prices of toys and motor vehicles rose by less than 1.0 percent.
The following figure shows 1-month inflation in these prices of these products. In July, motor vehicles prices and apparel prices increased by less than 1 percent, while toy prices increased by 1.9 percent after having soared soared by 24.3 percent in June. At least for these three products, it’s difficult to see tariffs as having had a significant effect on inflation in July.
To better estimate the underlying trend in inflation, some economists look at median inflation and trimmed mean inflation.
Median inflation is calculated by economists at the Federal Reserve Bank of Cleveland and Ohio State University. If we listed the inflation rate in each individual good or service in the CPI, median inflation is the inflation rate of the good or service that is in the middle of the list—that is, the inflation rate in the price of the good or service that has an equal number of higher and lower inflation rates.
Trimmed-mean inflation drops the 8 percent of goods and services with the highest inflation rates and the 8 percent of goods and services with the lowest inflation rates.
The following figure shows that 12-month trimmed-mean inflation (the blue line) was 3.2 percent in July, unchanged from June. Twelve-month median inflation (the red line) 3.6 percent in July, unchanged from June.
The following figure shows 1-month trimmed-mean and median inflation. One-month trimmed-mean inflation declined from 3.9 percent in June to 2.9 percent in July. One-month median inflation also declined from 4.1 percent in June to 3.7 percent in July. These data indicate that inflation may have slowed in July (the opposite conclusion we noted earlier when discussing 1-month core inflation), while remaining above the Fed’s 2 percent target.
What are the implications of this CPI report for the actions the Federal Reserve’s policymaking Federal Open Market Committee (FOMC) may take at its next meetings? Even before today’s relatively favorable, if mixed, inflation report, the unexpectedly weak jobs report at the beginning of the month (which we discuss in this blog post) made it likely that the FOMC would soon begin cutting its target for the federal funds rate.
Investors who buy and sell federal funds futures contracts assign a probability of 94.3 percent to FOMC cutting its target for the federal funds rate at its September 16–17 meeting by 0.25 (25 basis points) from its current target range of 4.25 percent to 4.50 percent. That probability increased from 85.9 percent yesterday. (We discuss the futures market for federal funds in this blog post.) Investors assign a probability of 61.5 percent to the FOMC cutting its target again by 25 basis points at its October 28–29 meeting, and a probability of 50.3 percent to a third 25 basis point cut at the committee’s December 9–10 meeting.
In June, the U.S. Census Bureau released its population estimates for 2024. Included was the following graphic showing the change in the U.S. population pyramid from 2004 to 2024. As the graphic shows, people 65 years and older have increased as a fraction of the total population, while children have decreased as a fraction of the total population. (The Census considers everyone 17 and younger to be a child.) Between 2004 and 2024, people 65 and older increased from 12.4 percent of the population to 18.0 percent. People younger than 18 fell from 25.0 percent of the population in 2004 to 21.5 percent in 2024.
The aging of the U.S. population reflects falling birth rates. Demographers and economists typically measure birth rates as the total fertility rate (TFR), which is defined by the World Bank as: “The number of children that would be born to a woman if she were to live to the end of her childbearing years and bear children in accordance with age-specific fertility rates currently observed.” The TFR has the advantage over the simple birth rate—which is the number of live births per thousand people—because the TFR corrects for the age structure of a country’s female population. Leaving aside the effects of immigration and emigration, a TFR of 2.1 is necessary to keep a country’s population stable. Stated another way, a country needs a TFR of 2.1 to achieve replacement level fertility. A country with a TFR above 2.1 experiences long-run population growth, while a country with a TFR of less than 2.1 experiences long-run population decline.
The following figure shows the TFR for the United States for each year between 1960 and 2023. Since 1971, the TFR has been below 2.1 in every year except for 2006 and 2007. Immigration has helped to offset the effects on population growth of a TFR below 2.1.
The United States is not alone in experiencing a sharp decline in its TFR since the 1960s. The following figure shows some other countries that currently have below replacement level fertility, including some countries—such as China, Japan, Korea, and Mexico—in which TFRs were well above 5 in the 1960s. In fact, only a relatively few countries, such as Israel and some countries in sub-Saharan Africa are still experiencing above replacement level fertility.
An aging population raises the number of retired people relative to the number of workers, making it difficult for governments to finance pensions and health care for older people. We discuss this problem with respect to the U.S. Social Security and Medicare programs in an Apply the Concept in Macroeconomics, Chapter 16 (Economics, Chapter 26 and Essentials of Economics, Chapter 18). Countries experiencing a declining population typically also experience lower rates of economic growth than do countries with growing populations. Finally, as we discuss in an Apply the Concept in Microeconomics, Chapter 3, different generations often differ in the mix of products they buy. For instance, a declining number of children results in declining demand for diapers, strollers, and toys.
… there were artists in government agencies drawing time series graphs. As we discuss in this recent blog post, the Bureau of Labor Statistics (BLS) has been in the news lately—undoubtedly much more than the people who work there would like.
This post is not about the current controversy but steps back to make a bigger point: The availability of data has increased tremendously from the time when Glenn and Tony began their academic careers. In the 1980s, personal computers were becoming widespread, but the internet had not yet developed to the point where government statistics were available to download. To gather data usually required a trip to the university library to make photocopies of tables in the print publications of the BLS and other government agencies. You then had to enter the data by hand into very crude—by current standards—spreadsheet and statistical software. The software generally had limited graphing capabilities.
How were the time series figures in print government publications generated? The two photos shown above (both from the website of the Library of Congress) show that the figures were hand drawn by artists. The upper photo is from 1962 and the lower photo is from 1971.
Today, most government data is readily available online. The FRED (Federal Reserve Economic Data) site, hosted by economists at the Federal Reserve Bank of St. Louis makes available thousands of data series. We make use of these series in the Data Exercises included in the end-of-chapter problems in our textbooks. The FRED site makes it easy (we hope!) to do these exercises, including by combining or otherwise transforming data series and by graphing them—no artistic ability required!
As we noted in yesterday’s blog post, the latest “Employment Situation” report from the Bureau of Labor Statistics (BLS) included very substantial downward revisions of the preliminary estimates of net employment increases for May and June. The previous estimates of net employment increases in these months were reduced by a combined 258,000 jobs. As a result, the BLS now estimates that employment increases for May and June totaled only 33,000, rather than the initially reported 291,000. According to Ernie Tedeschi, director of economics at the Budget Lab at Yale University, apart from April 2020, these were the largest downward revisions since at least 1979.
The size of the revisions combined with the estimate of an unexpectedly low net increase of only 73,000 jobs in June prompted President Donald Trump to take the unprecedented step of firing BLS Commissioner Erika McEntarfer. It’s worth noting that the BLS employment estimates are prepared by professional statisticians and economists and are presented to the commissioner only after they have been finalized. There is no evidence that political bias affects the employment estimates or other economic data prepared by federal statistical agencies.
Why were the revisions to the intial May and June estimates so large? The BLS states in each jobs report 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.” An article in the Wall Street Journal notes that: “Much of the revision to May and June payroll numbers was due to public schools, which employed 109,100 fewer people in June than BLS believed at the time.” The article also quotes Claire Mersol, an economist at the BLS as stating that: “Typically, the monthly revisions have offsetting movements within industries—one goes up, one goes down. In June, most revisions were negative.” In other words, the size of the revisions may have been due to chance.
Is it possible, though, that there was a more systematic error? As a number of people have commented, the initial response rate to the Current Employment Statistics (CES) survey has been declining over time. Can the declining response rate be the cause of larger errors in the preliminary job estimates?
In an article published earlier this year, economists Sylvain Leduc, Luiz Oliveira, and Caroline Paulson of the Federal Reserve Bank of San Francisco assessed this possibility. Figure 1 from their article illustrates the declining response rate by firms to the CES monthly survey. The figure shows that the response rate, which had been about 64 percent during 2013–2015, fell significantly during Covid, and has yet to return to its earlier levels. In March 2025, the response rate was only 42.6 percent.
The authors find, however, that at least through the end of 2024, the falling response rate doesn’t seem to have resulted in larger than normal revisions of the preliminary employment estimates. The following figure shows their calculation of the average monthly revision for each year beginning with 1990. (It’s important to note that they are showing the absolute values of the changes; that is, negative change are shown as positive changes.) Depite lower response rates, the revisions for the years 2022, 2023, and 2024 were close to the average for the earlier period from 1990 to 2019 when response rates to the CES were higher.
The weak employment numbers correspond to the period after the Trump administration announced large tariff increases on April 2. Larger firms tend to respond to the CES in a timely manner, while responses from smaller firms lag. We might expect that smaller firms would have been more likely to hesitate to expand employment following the tariff announcement. In that sense, it may be unsurprising that we have seen downward revisions of the prelimanary employment estimates for May and June as the BLS received more survey responses. In addition, as noted earlier, an overestimate of employment in local public schools alone accounts for about 40 percent of the downward revisions for those months. Finally, to consider another possibility, downward revisions of employment estimates are more likely when the economy is heading into, or has already entered, a recession. The following figure shows the very large revisisons to the establishment survey employment estimates during the 2007–2010 period.
At this point, we don’t fully know the reasons for the downward employment revisions announced yesterday, although it’s fair to say that they may have been politically the most consequential revisions in the history of the establishment survey.
This morning (August 1), the Bureau of Labor Statistics (BLS) released its “Employment Situation” report (often called the “jobs report”) for July. The data in the report show that the labor market was weaker than expected in July. There have been many stories in the media about firms becoming cautious in hiring as a result of the Trump administration’s tariff increases. Some large firms—including Microsoft, Walt Disney, Walmart, and Proctor and Gamble—have announced layoffs. In addition, real GDP growth slowed during the first half of the year. Nevertheless, until today it appeared that employment growth remained strong.
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 only 73,000 nonfarm jobs during July. This increase was below the increase of 1115,000 that economists surveyed by Factset had forecast. In addition, the BLS revised downward its previous estimates of employment in May and June by a combined 258,000 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.”) 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 shows the striking deceleration in job growth during the second quarter of this year.
The unemployment rate increased from 4.1 percent in June to 4.2 percent in July, which is the same rate as economists surveyed had forecast. As the following figure shows, the unemployment rate has been remarkably stable over the past year, staying between 4.0 percent and 4.2 percent in each month since May 2024. In June, the members of the Federal Open Market Committee (FOMC) forecast that the unemployment rate for 2025 would average 4.5 percent. The unemployment rate would have to rise significantly in the second half of the year for that forecast to be accurate.
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 111,573 net new jobs each month to keep the unemployment rate stable at 4.2 percent. If this estimate is accurate, continuing monthly net job increases of 73,000 would result in a slowly 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 net change in jobs from the establishment survey. As measured by the household survey, there was a net decrease of 260,000 jobs in July, following an increase of 93,000 jobs in June. 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 with employment increasing in one survey while falling in the other, which was the case this month. (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 forprime age workers—those aged 25 to 54. In July the ratio declined to 80.4 percent from 80.7 percent in June. 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 November 2019. Further declines in the prime-age employment-population ratio would be a strong indication of a softening labor market.
It is still unclear how many federal workers have been laid off since the Trump Administration took office. The establishment survey shows a decline in federal government employment of 12,000 in June and a total decline of 84,000 since the beginning of February 2025. However, the BLS notes that: “Employees on paid leave or receiving ongoing severance pay are counted as employed in the establishment survey.” It’s possible that as more federal employees end their period of receiving severance pay, future jobs reports may report a larger decline in federal employment. To this point, the decline in federal employment has been too small to have a significant 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 3.9 percent in July, up from an increase of 3.8 percent in June.
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 July, the 1-month rate of wage inflation was 4.0 percent, up from 3.0 percent in June. If the July rate of wage inflation is sustained, it would complicate the Fed’s task of achieving its 2 percent target rate of price inflation. But one month’s data from such a volatile series may not accurately reflect longer-run trends in wage inflation.
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.) Yesterday, as we noted in a blog post, investors assigned a 60.8 percent probability to the committee keeping its target unchanged at 4.25 percent to 4.50 percent at its September 16–17 meeting. As the following figure shows, there has been a sharp change in investors’ expectations. As of this morning, investors are assigning a 78.9 percent probability to the committee cutting its target by 0.25 percentage point (25 basis points) to a range of 4.00 percent to 4.25 percent.
There is a similarly dramatic change in investors’ expectations of the target range for the federal funds rate following the FOMC’s October 28–29 meeting. As the following figure shows, investors now assign a probability of 57.3 percent to the committee lowering its target range to 3.75 percent to 4.00 percent at that meeting. Yesterday, investors assigned a probability of only 13.7 percent to that outcome.
Yesterday, in this blog post, we discussed the quarterly data on inflation as measured by changes in the personal consumption expenditures (PCE) price index. Today (July 31), the Bureau of Economic Analysis (BEA) released monthly data on the PCE price index as part of its “Personal Income and Outlays” report. 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 January 2017, with inflation measured as the percentage change in the PCE from the same month in the previous year. In June, headline PCE inflation was 2.6 percent, up from 2.4 percent in May. Core PCE inflation in June was 2.8 percent, unchanged from May. Headline PCE inflation was higher than the forecast of economists surveyed, while core PCE inflation was the same as forecast.
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 this figure shows 1-month inflation.) Measured this way, headline PCE inflation jumped from 2.0 percent in May to 3.4 percent in June. Core PCE inflation increased from 2.6 percent in May to 3.1 percent in June. So, both 1-month PCE inflation estimates are well above the Fed’s 2 percent target. The usual caution applies that 1-month inflation figures are volatile (as can be seen in the figure), so we shouldn’t attempt to draw wider conclusions from one month’s data. In addition, these data likely don’t capture fully the higher prices likely to result from the tariff increases the Trump administration has implemented, including those in trade agreements that have only been announced in the past few days.
Fed Chair Jerome Powell has frequently noted 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 fall, the prices of financial services included in the PCE price index also fall. 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 2.3 percent in June, up from 2.1 percent in May. Core market-based PCE inflation was 2.6 percent in June, up from 2.4 percent in May. So, both market-based measures show similar rates of inflation in June as the total measures do. In the following figure, we look at 1-month inflation using these measures. The 1-month inflation rates are both higher than the 12-month rates. One-month headline market-based inflation soared to 3.9 percent in June from 1.6 percent in May. One-month core market-based inflation also increased sharply to 3.6 percent in June from 2.2 percent in May. 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. Still, looking at 1-month inflation gives us a better look at current trends in inflation, which these data indicate is rising significantly.
Is the increase in inflation attributable to the effects of tariffs? At this point, it’s too early to tell, particularly since, as noted earlier, all tariff increases have not yet been implemented. We can note, though, that the effect of tariffs are typically seen in goods prices, rather than in service prices because tariffs are levied primarily on imports of goods. As the following figure shows, one-month inflation in goods prices jumped from 0.9 percent in May to 4.8 percent in June, while one-month inflation in services prices increased only from 2.5 percent in May to 2.8 percent in June.
Finally, we noted in a blog post yesterday that investors trading federal funds rate futures assigned a 55.0 percent probability to the Federal Open Market Committee leaving its target for the federal funds rate unchanged at its meeting on September 16–17. With today’s PCE report showing higher than expected inflation, that probability has increased to 60.8 percent.
Photo of President Trump and Fed Chair Powell from Reuters via the Wall Street Journal
Today’s meeting of the Federal Reserve’s policymaking Federal Open Market Committee (FOMC) occurred against a backdrop of President Trump pressuring the committee to reduce its target for the federal funds rate and two members of the Board of Governors signalling that they were likely to dissent if the committee voted to hold its target constant.
Last week President Trump made an unusual visit to the Fed’s headquarters in Washington, DC to discuss what he had said was the Fed’s excessive spending on renovating three buildings. As we discuss in this blog post, the Supreme Court is unlikely to allow a president to remove a Fed chair because of disagreements over monetary policy. A president would likely be allowed to remove a Fed chair “for cause.” Some members of the Trump administration have argued that excessive spending on renovating buildings might be sufficient cause for the president to remove Fed Chair Jerome Powell. President Trump has indicated that, in fact, he doesn’t intend to replace Powell before his term as chair ends in May 2026, but President Trump still urged Powell to make substantial cuts in the federal funds rate target.
As most observers had expected, the committee decided today to keep its target range for the federal funds rate unchanged at 4.25 percent to 4.50 percent. Board of Governors members Michelle Bowman and Christopher Waller dissented, preferring “to lower the target range for the federal funds rate by 1/4 percentage point at this meeting.” It was the first time since 1993 that two members of the Board of Governors have voted against an FOMC decision.
The following figure shows, for the period since January 2010, the upper bound (the blue line) and lower bound (the green line) for the FOMC’s target range for the federal funds rate and the actual values of the federal funds rate (the red line) during that time. 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 in its target range in Macroeconomics, Chapter 15, Section 15.2 (Economics, Chapter 25, Section 25.2).)
In his press conference following the meeting, Chair Powell indicated that a majority of the committee believed that: “Inflation is above target, maximum employment is at target, so policy should be slightly restrictive.” Policy is restrictive in the sense that the current range for the federal funds rate is higher than the long-run equilibrium rate. Powell noted that: “There are many uncertainties left to resolve. There is much more to come looking ahead.” Jn particular, with respect to the effect of tariffs, he stated that it’s “still quite early days …. [We’ve] seen substantial increases in tariff revenue collections … [but we] have to see how much of tariffs are passed through to consumers. A long way to go to know what has happened.”
One reason that President Trump has urged the FOMC to lower its target for the federal funds rate is that lower interest rates will reduce the amount the federal government has to pay on the $25 trillion in U.S. Treasury debt owned by private investors. At his press conference, Chair Powell was asked whether the committee discussed interest payments on the national debt during its deliberations. He responded that the committee considers only the dual mandate of price stability and maximum employment given to the Fed by Congress. Therefore, “We don’t consider the fiscal needs of the federal government.”
The FOMC’s next meeting is on September 16–17. Powell noted that before that meeting, the committee will have seen two more employment reports and two more inflation reports. The data in those reports may clarify the state of the economy. There has been a general expectation that the committee would cut its target for the federal funds rate at that meting
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.) The data from the futures market indicate that one month ago investors assigned a 75.4 percent probability to the committee cutting its target range by 0.25 percentage point (25 basis points) to 4.00 percent to 4.25 percent at the September meeting. Today, however, sentiment has changed, perhaps because investors now believe that inflation in coming months will be higher than they had previously expected. As the following figure shows, investors now assign a 55.0 percent probability to the committee leaving its target for the federal funds rate unchanged at that meeting and only a 45 percent probability of the committee cutting its target range by 25 basis points.
This morning (July 30), the Bureau of Economic Analysis (BEA) released its advance estimate of real GDP for the first quarter of 2025. (The report can be found here.) The BEA estimates that real GDP increased by 3.0 percent, measured at an annual rate, in the second quarter—April through June. Economists surveyed had expected a 2.4 percent increase. Real GDP declined by an estimated 0.5 percent in the first quarter of 2025, so the increase in the second quarter represents a strong rebound in economic growth. 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 decrease in imports in the second quarter was the most important factor contributing to the increase in real GDP. During the first quarter, imports had soared as businesses tried to stay ahead of what were expected to be large tariff increases implement by the Trump Administration. Consumption spending increased in the second quarter, while investment spending and exports decreased.
It’s notable that real private inventories declined by $29.6 billion in the second quarter after having increased by $2070 billion in the first quarter. Again, it’s likely that the large swings in inventories represented firms stockpiling goods in the first quarter in anticipation of the tariff increases and then drawing down those stockpiles in the second quarter.
One way to strip out the effects of imports, inventory investment, and government purchases—which can also be volatile—is to look at real final sales to 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 1.2 percent in the second quarter of 2025, which was a decrease from the 1.9 percent increase in the first quarter. The large difference between the change in real GDP and the change in real final sales to domestic purchasers is an indication of how strongly the data on national income in the first two quarters of 2025 were affected by businesses anticipating tariff increases. Compared with data on real GDP, data on real final sales to domestic purchasers shows the economy doing significantly better in the first quarter and significantly worse in the second quarter.
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 2018, with inflation measured as the percentage change in the PCE from the same quarter in the previous year. In the second quarter, headline PCE inflation was 2.4 percent, down slightly from 2.5 percent in the first quarter. Core PCE inflation in the second quarter was 2.7 percent, down from 2.8 percent in the first quarter. Both headline PCE inflation and core PCE inflation remained 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 decreased from 3.7 percent in the first quarter of 2025 to 2.1 percent in the second quarter. Core PCE inflation decreased from 3.5 percent in the first quarter of 2025 to 2.5 percent in the secondt quarter. Measured this way, headline PCE inflation in the second quarter was close to the Fed’s target, while core PCE was well above the target. As we discuss in this blog post, tariff increases result in an aggregate supply shock to the economy. As a result, we may see a significant increase in inflation in the coming months as the higher tariff rates that have been negotiated recently begin to be implemented.
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