Ch27: Inflation, Unemployment, and Federal Reserve Policy

CPI Inflation Slows but Some Data Are Missing from Latest Report

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On Thursday (December 18) the Bureau of Labor Statistics (BLS) released its latest report on the consumer price index (CPI). The federal government shutdown, which lasted from October 1 to November 12, is still affecting the macroeconomic statistics being gathered by the BLS and other agencies. The BLS notes in the report:

“BLS did not collect survey data for October 2025 due to a lapse in appropriations. BLS was unable to retroactively collect these data. For a few indexes, BLS uses nonsurvey data sources instead of survey data to make the index calculations. BLS was able to retroactively acquire most of the nonsurvey data for October. CPI data collection resumed on November 14, 2025.”

The following table from the CPI report gives an indication of how much data that is normally collected wasn’t collected in October or November.

Bearing in mind the missing data, the following figure compares headline CPI inflation (the blue bar) and core CPI inflation (the red bar) as reported in this month’s CPI report.

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 November, down from 3.0 in September.
The core inflation rate, which excludes the prices of food and energy, was 2.6 percent in November, down from 3.0 percent in September.

Economists who were surveyed by Fact Set had forecast that both headline inflation and core inflation would rise to 3.1 percent in November. Economists surveyed by the Wall Street Journal also forecast that headline inflation would rise to 3.1 percent in November, but forecast that core inflation would rise slightly less to 3.0 percent. It’s unclear whether the economists were aware at the time they were surveyed how much data for October and November would be missing from this month’s report.

Because of how much data that is normally collected was missing from the calculations of November’s inflation rate, the results should be treated with caution. The Wall Street Journal quoted an economist at the investment bank UBS as advising: “I think you largely just put this one to the side. Maybe this report gives a minor downward sign for overall inflation, but the vast, vast majority of this is just noise and should be ignored.”

Several economists were concerned about the computation the BLS had to make to deal with the lack of direct data on the price of “shelter.” 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 CPI inflation, measured as the percentage change since the same month in the previous year, leaving out the price of shelter. Measured this way, inflation was 2.6 percent in November, which is slightly lower than the 2.7 percent inflation rate the BLS reported when including all items.

What effect have the tariffs that the Trump administration announced on April 2 had on inflation? (Note that many of the tariff increases announced on April 2 have since been reduced.) The following figure shows 12-month inflation in durable goods—such as furniture, appliances, and cars—which are likely to be affected directly by tariffs, and services, which are less likely to be affected by tariffs. To make recent changes clearer, we look only at the months since January 2022. In November, inflation in durable goods decreased to 1.8 percent from 2.2 percent in September. Inflation in services in November was 3.2 percent, down from 3.6 percent in September. So the upward pressure on goods prices from the tariffs seems to be declining. But, again, missing data makes it’s unclear to what extent November inflation numbers are representative of what’s actually happening currently to prices.

It’s unlikely that this inflation report will have much effect on the views of the members of the Federal Reserve’s policymaking Federal Open Market Committee. In a press conference after the committee’s most recent meeting, Fed Chair Jerome Powell cautioned against drawing firm conclusions from data for October and November:

“I should mention on the data, as long as I’m talking about it, that we’re going to need to be careful in assessing particularly the household survey data. There are very technical reasons about the way data are collected in some of these measures, both in, you know, inflation and in labor—in the labor market so that the data may be distorted. And not just sort of more volatile, but distorted. And that—it’s—and that’s really because data was not collected in October and half of November. So we’re going to get data, but we’re going to have to look at it carefully and with a somewhat skeptical eye by the time of the January meeting ….”

Three Dissents as the FOMC Cuts Its Target for the Federal Funds Rate

Photo 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 lower its target for the federal funds rate from a range of 3.75 percent to 4.00 percent to a range of 3.50 percent to 3.75 percent—a cut of 25 basis points. The members of the committee voted 9 to 3 in favor of the cut. Fed Governor Stephen Miran voted against the action, preferring to lower the target range for the federal funds rate by 50 basis points. President Austan Goolsbee of the Federal Reserve Bank of Chicago and President Jeffrey Schmid of the Federal Reserve Bank of Kansas City also voted against the action, preferring to leave the target range unchanged.

The following figure shows for the period since January 2010, the upper bound (the blue line) and the lower bound (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).)

After the meeting, the committee also released a “Summary of Economic Projections” (SEP)—as it typically does after its March, June, September, and December meetings. The SEP presents median values of the 19 committee members’ forecasts of key economic variables. The values are summarized in the following table, reproduced from the release. (Note that only 5 of the district bank presidents vote at FOMC meetings, although all 12 presidents participate in the discussions and prepare forecasts for the SEP.)

There are several aspects of these forecasts worth noting:

Compared with September, the committee members increased their forecasts of real GDP growth for each year from 2025 through 2027. The increase for 2026 was substantial, from 1.8 percent to 2.3 percent, although some of this increase was attributable to the federal government shutdown causing some economic output to be shifted from 2025 to 2026. Committee members slightly decreased their forecasts of the unemployment rate in 2027. They left their forecast of the unemployment rate in the fourth quarter of 2025 unchanged at 4.5 percent.
Committee members reduced their forecasts for personal consumption expenditures (PCE) price inflation for 2025 and 2026. Similarly, their forecasts of core PCE inflation for 2025 and 2026 were also reduced. The committee does not expect that PCE inflation will decline to the Fed’s 2.0 percent annual target until 2028.
The committee’s forecasts of the federal funds rate at the end of each year from 2025 through 2028 were unchanged.

Prior to the meeting there was much discussion in the business press and among investment analysts about the dot plot, shown below. Each dot in the plot represents the projection of an individual committee member. (The committee doesn’t disclose which member is associated with which dot.) Note that there are 19 dots, representing the 7 members of the Fed’s Board of Governors and all 12 presidents of the Fed’s district banks.

The plots on the far left of the figure represent the projections by the 19 members of the value of the federal funds rate at the end of 2025. The fact that several members of the committee preferred that the federal funds rate end 2025 above 4 percent—in other words higher than it will be following the vote at today’s meeting—indicates that several non-voting district bank presidents, beyond Goolsbee and Schmid, would have preferred to not cut the target range. The plots on the far right of the figure indicate that there is substantial disagreement among comittee members as to what the long-run value of the federal funds rate—the so-called neutral rate—should be.

During his press conference following the meeting, Powell indicated that the increase in inflation in recent months was largely due to the effects of the increase in tariffs on goods prices. Powell indicated that committee members expect that the tariff increases will cause a one-time increase in the price level, rather than causing a long-term increase in the inflation rate. Powell also noted the recent slow growth in employment, which he noted might actually be negative once the Bureau of Labor Statistics revises the data for recent months. This slow growth indicated that the risk of unemployment increasing was greater than the risk of inflation increasing. As a result, he said that the “balance of risks” caused the committee to believe that cutting the target for the federal funds rate was warranted to avoid the possibility of a significant rise in the unemployment rate.

The next FOMC meeting is on January 27–28. By that time a significant amount of new macroeconomic data, which has not been available because of the government shutdown, will have been released. It also seems likely that President Trump will have named the person he intends to nominate to succeed Powell as Fed chair when Powell’s term ends on May 15, 2026. (Powel’s term on the Board doesn’t end until January 31, 2028, although he declined at the press conference to say whether he will serve out the remainder of his term on the Board after he steps down as chair.) In addition, it’s possible that by the time of the next meeting the Supreme Court will have ruled on whether President Trump can legally remove Governor Lisa Cook from the Board and on whether President Trump’s tariff increases this year are Constitutional.

PCE Inflation Increases Slightly in September

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Today (December 5), the Bureau of Economic Analysis (BEA) released monthly data on the personal consumption expenditures (PCE) price index for September as part of its “Personal Income and Outlays” report. Release of the report was delayed by the federal government shutdown.

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 September, headline PCE inflation was 2.8 percent, up slightly from 2.7 percent in August. Core PCE inflation in September was also 2.8 percent, down slightly from 2.9 percent in August. Both headline and core PCE inflation were equal to the forecast of economists surveyed.

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 3.1 percent in August to 3.3 percent in September. Core PCE inflation declined from 2.7 percent in August to 2.4 percent in September. 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). In addition, these data are for September and likely don’t fully reflect the situation nearly two months later.

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 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 2.6 percent in September, up from 2.4 percent in August. Core market-based PCE inflation was 2.6 percent in September, unchanged from August. 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 increase sharply to 3.7 percent in September from 2.6 percent in August. One-month core market-based inflation increased to 2.7 percent in September from 2.0 percent in August. 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 real personal consumptions expenditures for each month since January 2023. Measured this way, the growth in real personal consumptions expenditures slowed sharply in September to 0.5 percent from 3.0 percent in August.

Does the slowing in consumptions spending indicate that real GDP may have also grown slowly in the third 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 forecast—taking into account today’s data on real personal consumption expenditures—is for real GDP to grow at an annual rate of 3.5 percent in the third quarter, which reflects continuing strong growth in other measures of output.

In a number of earlier blog posts, we discussed the policy dilemma facing the Fed. Despite the Atlanta Fed’s robust estimate of real GDP growth, there are some indications that the labor market may be weakening. For instance, earlier this week ADP estimated that private sector employment declined by 32,000 jobs in November. (We discuss ADP’s job estimates in this blog post.) As the Fed’s policy-making Federal Open Market Committee (FOMC) prepares for its next meeting on December 9–10, it has to balance guarding against a potential decline in employment with concern that inflation has not yet returned to the Fed’s 2 percent annual target.

If the committee decides that inflation is the larger concern, it is likely to leave its target range for the federal funds rate unchanged. If it decides that weakness in the labor market is the larger concern, it is likely to reduce it target range by 0.25 percentage point (25 basis points). Statements by FOMC members indicate that opinion on the committee is divided. In addition, the Trump administration has brought pressure on the committee to cut its target 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.) Investors’ expectations have been unusually volatile during the past two months as new macroeconomic data or new remarks by FOMC members have caused swings in the probability that investors assign to the committee cutting the target range.

As of this afternoon, investors assigned a 87.2 percent probability to the committee cutting its target range for the federal funds rate by 25 basis points to 3.50 percent to 3.75 percent at its December meeting. At the December meeting the committee will also release its Summary of Economic Projections (SEP) giving members forecasts of future values of the inflation rate, the unemployment rate, the federal funds rate, and the growth rate of real GDP. The SEP, along with Fed Chair Powell’s remarks at his press conference following the meeting, should provide additional information on the monetary policy path the committee intends to follow in the coming months.

When John Williams Speaks … Investors Listen

Photo of Federal Reserve Bank of New York President John Williams from newyorkfed.org

Many economists consider the three most influential people at the Federal Reserve to be the chair of the Board of Governors, the vice-chair of the Board of Governors, and the president of the Federal Reserve Bank of New York. The influence of the New York Fed president is attributable in part to being the only president of a District Bank to be a voting member of the Federal Open Market Committee (FOMC) every year and to the New York Fed being the location of the Open Market Desk, which is charged with implementing monetary policy. The Open Market Desk undertakes open market operations—buying and selling Treasury securities—and conducts repurchase agreements (repos) and reverse repurchase agreements (reverse repos) with the aim of keeping the federal funds rate within the target range specified by the FOMC. (We discuss the mechanics of how monetary policy is conducted in Macroeconomics, Chapter 15, Economics, Chapter 25, and Money, Banking, and the Financial System, Chapter 15.)

John Williams has served as president of the New York Fed since 2018. Given his important role in the formulation and execution of monetary policy, investors pay close attention to his speeches and other public remarks looking for clues about the likely future path of monetary policy. As we noted yesterday in a post discussing the latest jobs report, Fed watchers were uncertain as to whether the FOMC would cut its target for the federal funds rate at its next meeting on December 9–10.

Yesterday morning, investors who buy and sell federal funds futures contracts assigned a probability of 39.6 percent to the FOMC cutting its target range for the federal funds rate by 0.25 percentage point (25 basis points) from 3.75 percent to 4.00 to 3.50 percent to 3.75 percent. Today in a speech delivered at the Central Bank of Chile, John Williams stated that:”I still see room for a further adjustment in the near term to the target range for the federal funds rate to move the stance of policy closer to the range of neutral, thereby maintaining the balance between the achievement of our two goals” of maximum employment and price stability.

Investors interpreted this statement as indicating that Williams would support cutting the target range for the federal funds rate at the December FOMC meeting. Given his position on the committee, it seemed unlikely that Williams would have publicly supported a rate cut unless he believed that a majority of the committee would also support it. As the following figure shows, after the text of Williams’s speech was released this morning, investors in the federal funds futures market increased the probability they assigned to a rate cut to 69.4 percent. That movement in the federal funds futures market was a recognition of the important role the president of the New York Fed plays in formulating monetary policy.

Congratulations to Pace University for Winning the 2025 College Fed Challenge

Photo from federalreserve.gov of the Pace University Fed Challenge team and their faculty advisers

Each year the Federal Reserve sponsors a competition among college student teams. As desribed on the Fed’s website, in the competition “Teams analyze economic and financial conditions and formulate a monetary policy recommendation, modeling the Federal Open Market Committee.”

This year’s winner is Pace University, representing the New York Federal Reserve District. Harvard College took second place and the University of California, Los Angeles took third place. The University of Pennsylvania, the University of Chicago, and Davidson College received honorable mentions. In 2024, the competition was won by the team from Princeton University, representing the Philadelphia Federal Reserve District.

This year, 139 colleges in 36 states participated in the competition. The rules of the competition are described here. After the competition, Federal Reserve Chair Jerome Powell noted that: “Fed Challenge offers undergraduate students an opportunity to learn firsthand about monetary policy and the work of the Federal Reserve. I thank these students for the dedication, creativity, and analytical skills they demonstrated as they grappled with real-world economic challenges.”

Surprisingly Strong September Jobs Report

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If not for the shutdown of the federal government, the Bureau of Labor Statistics (BLS) would have already released its “Employment Situation” report (often called the “jobs report”) for September and October by now. The September jobs report was released today based largely on data collected before the shutdown.

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.)

Because the household survey wasn’t conducted in October, the data in the October report that relies on the household survey won’t be included when the BLS releases establishment employment data for October on December 16. The data for September released today showed the labor market was stronger than expected in that month.

According to the establishment survey, there was a net increase of 119,00 nonfarm jobs during September. This increase was well above the increase of 50,000 that economists surveyed by FactSet had forecast. Economists surveyed by the Wall Street Journal had also forecast a net increase of 50,000 jobs. The relatively large increase in employment in September was partially offset by the BLS revising downward by a combined 33,000 jobs its previous estimates of employment in July and August. The estimate for August was revised from a net gain of 22,000 to a net loss of 4,000. (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 makes clear the striking deceleration in job growth beginning in May. 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.

As shown in the following figure, the unemployment rate increased from 4.3 percent in August to 4.4 percent in September, the highest rate since October 2021. The unemployment rate is above the 4.3 percent rate economists surveyed by FactSet had forecast. The unemployment rate had been remarkably stable, staying between 4.0 percent and 4.2 percent in each month from May 2024 to July 2025, before breaking out of that range in August. In September, the members of the Federal Open Market Committee (FOMC) forecast that the unemployment rate during the fourth quarter of 2025 would average 4.5 percent. The FOMC’s current estimate of the natural rate of unemployment—the normal rate of unemployment over the long run—is 4.2 percent. (We discuss the natural rate of unemployment in Macroeconomics, Chapter 9 and Economics, Chapter 19.)

Each month, the Federal Reserve Bank of Atlanta estimates how many net new jobs are required to keep the unemployment rate stable. Given slower growth in 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 111,878 net new jobs each month to keep the unemployment rate stable at 4.4 percent. If this estimate is accurate, if the average monthly net job increase from May through September of 38,600 were to continue, the result would be 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 net change in jobs from the establishment survey. As measured by the household survey, there was a net increase of 251,000 jobs in September, following a net increase of 288,000 jobs in August. 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 in September 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 September the ratio was 80.7 percent, the same as in August. 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 continued high levels of the prime-age employment-population ratio indicates strength in the 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 3,000 in September and a total decline of 97,000 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 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 September, the same as in August.

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 September, the 1-month rate of wage inflation was 3.0 percent, down from 5.1 percent in August. This slowdown in wage growth may be an indication of a weakening labor market. 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 range for the federal funds rate? The minutes from the FOMC’s last meeting on October 28–29 indicate that committee members had “strongly differing views” over whether to cut the target range by 0.25 percentage point (25 basis points) at its next meeting on December 9–10 or to leave the target range unchanged.

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.) A month ago, investors assigned a 98.8 percent probability of the committee cutting its target range to 3.50 percent to 3.75 percent at its December meeting. Since that time indications have increased that output and employment growth have continued to be relatively strong and that inflation is stuck above the Fed’s 2 percent annual target. This morning, as the following figure shows, investors assign a probability of 60. 4 percent to the committee keeping its target unchanged at 3.75 percent to 4.00 percent at the December meeting. Committee members will also release their Summary of Economic Projections (SEP) at that meeting. The SEP, along with Fed Chair Powell’s remarks at his press conference following the meeting, should provide additional information on the monetary policy path the committee intends to follow in the coming months.

NEW! 11-07-25- Podcast – Authors Glenn Hubbard & Tony O’Brien discuss Tariffs, AI, and the Economy

Glenn Hubbard and Tony O’Brien begin by examining the challenges facing the Federal Reserve due to incomplete economic data, a result of federal agency shutdowns. Despite limited information, they note that growth remains steady but inflation is above target, creating a conundrum for policymakers. The discussion turns to the upcoming appointment of a new Fed chair and the broader questions of central bank independence and the evolving role of monetary policy. They also address the uncertainty surrounding AI-driven layoffs, referencing contrasting academic views on whether artificial intelligence will complement existing jobs or lead to significant displacement. Both agree that the full impact of AI on productivity and employment will take time to materialize, drawing parallels to the slow adoption of the internet in the 1990s.

The podcast further explores the recent volatility in stock prices of AI-related firms, comparing the current environment to the dot-com bubble and questioning the sustainability of high valuations. Hubbard and O’Brien discuss the effects of tariffs, noting that price increases have been less dramatic than expected due to factors like inventory buffers and contractual delays. They highlight the tension between tariffs as tools for protection and revenue, and the broader implications for manufacturing, agriculture, and consumer prices. The episode concludes with reflections on the importance of ongoing observation and analysis as these economic trends evolve.

https://w.soundcloud.com/player/?url=https%3A//api.soundcloud.com/tracks/soundcloud%253Atracks%253A2208512723&color=%23ff5500&auto_play=false&hide_related=false&show_comments=true&show_user=true&show_reposts=false&show_teaser=true&visual=true

Pearson Economics · Hubbard OBrien Economics Podcast – 11-06-25 – Economy, AI, & Tariffs

FOMC Meeting Results in Expected Rate Cut

Photo of Federal Reserve Chair Jerome Powell from federalreserve.gov

Today’s meeting of the Federal Reserve’s policymaking Federal Open Market Committee (FOMC) occurred against a backdrop of a shutdown of the federal government that has delayed release of most government economic data. (We discuss the government shutdown here, here, and here.)

As most observers had expected, the committee decided today to lower its target for the federal funds rate from a range of 4.00 percent to 4.25 percent to a range of 3.75 percent to 4.oo percent—a cut of 0.25 percentage point, or 25 basis points. The members of the committee voted 10 to 2 for the 25 basis point cut with Governor Stephen Miran dissenting because he preferred a 50 basis point cut and Jeffrey Schmid, president of the Federal Reserve Bank of Kansas City, dissenting because he preferred that the target range be left unchanged at this meeting.

The following figure shows, for the period since January 2010, the upper bound (the blue line) and the lower bound (the green line) for the FOMC’s target range for the federal funds rate, as well as the actual values of 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 in its target range in Macroeconomics, Chapter 15, Section 15.2 (Economics, Chapter 25, Section 25.2).)

During his press conference following the meeting, Fed Chair Jerome Powell made news by stating that a further cut in the target rate at the FOMC’s meeting on December 9–10 is not a foregone conclusion. This statement came as a surprise to investors who buy and sell federal funds futures contracts. (We discuss the futures market for federal funds in this blog post.) As of yesterday, investors has assigned a probability of 90.5 percent to the committee cutting its target range by another 25 basis points at the December meeting. Today that probability dropped to zero. Instead investors now assign a probability of 67.8 percent to the target remaining unchanged at that meeting, and a probability of 32.2 percent of the committee raising its target by 25 basis points.

Powell also indicated that he believes that the recent increase in inflation was largely due to the effects of the increase in tariff rates that the Trump administration began implementing in April. (We discuss the recent data on inflation in this post.) Powell indicated that committee members expect that the tariff increases will cause a one-time increase in the price level, rather than a long-term increase in the inflation rate. As a result, he said that the shift in the “balance of risks” caused the committee to believe that cutting the target for the federal funds rate was warranted to avoid the possibility of a significant rise in the unemployment rate.

In discussing inflation, Powell highlighted three aspects of the recent CPI report: inflation in goods, inflation in shelter, and inflation in services not including shelter. (The BLS explains is measurement of shelter here.) The following figure shows inflation in each of those categories, measured as the percentage increase from the same month in the previous year. Inflation in goods (the blue line) has been trending up, reflecting the effect of increased tariffs rates. Inlation in shelter (the red line) and in services minus shelter (the green line) have generally been trending downward. Powell noted that the decline in inflation in shelter has been slower than most members of the committee had expected.

Still, Powell argued that with the downward trend in services, once the temporary inflation in goods due to the effects of tariffs had passed through the economy, inflation was likely to be close the Fed’s 2 percent annual target. He thought this was particularly likely to be true because even after today’s cut, the federal funds rate was “restrictive” because it remained above its long-run nominal and real values. A restrictive monetary policy will slow spending and inflation.

In the following figure, we look at the 1-month inflation rates—that is, the annual inflation rates calculated by compounding the current month’s rates over an entire year—for the same three categories. Calculated as the 1-month inflation rate, goods inflation (the blue line) was running at a very high 6.6 percent in September. inflation in shelter (the red line) had declined to 2.5 per cent in September. Inflation in services minus shelter rose slightly in September to 2.1 percent.

Assuming that the shutdown of the federal government ends within the next few weeks, members of the FOMC will have a great deal of data on inflation, real GDP growth, and employment to consider before their next meeting in December.

Who Will President Trump Nominate to Be Fed Chair?

Kevin Hassett, director of the National Economic Council (photo from the AP via the Wall Street Journal)

Jerome Powell’s second term as chair of the Federal Reserve’s Board of Governor ends on May 15,2026. (Although his term as a member of the Board of Governors doesn’t end until January 31, 2028, Fed chairs have typically resigned their seats on the Board at the time that their term as chair ends.) President Trump has been clear that he won’t renominate Powell to a third term. Who will he nominate?

Polymarket is a site on which people can bet on political outcomes, including who President Trump will choose to nominate as Fed chair. The different amounts wagered on each candidate determine the probabilities bettors assign to that candidate being nominated. The following table shows each candidate with a probability of least 1 percent of being nominated as of 5 pm eastern time on October 27.

Kevin Hassett, who is currently the director of the National Economic Council, has the highest probability at 36 percent. Fed Governor Christopher Waller, who was nominated to the Board by President Trump in 2020, is second with a 23 percent probability. Kevin Warsh, who served on the Board from 2006 to 2011, and was important in formulating monetary policy during the financial crisis of 2007–2009, is third with a probability of 16 percent. Rick Reider, an executive at the investment company Black Rock, is unusual among the candidates in not having served in government. Bettors on Polymarket assign him a 10 percent probability of being nominated. Stephen Miran and Michelle Bowman are current members of the Board who were nominated by President Trump.

Scott Bessent is the current Treasury secretary and has indicated that he doesn’t wish to be nominated. James Bullard served as president of the Federal Reserve Bank of St. Louis from 2008 to 2023. David Zervos is an executive at the Jeffries investment bank and in 2009 served as an adviser to the Board of Governors. Lorie Logan is president of the Federal Reserve Bank of Dallas and Philip Jefferson is currently vice chair of the Board of Governors.

Today, Treasury Secretary Scott Bessent indicated that the list of candidates had been reduced to five—although bettors on Polymarket indicate that they believe these five are likely to be the first five candidates listed in the chart above, it appears that Bowman, rather than Miran, is the fifth candidate on Bessent’s lists. Bessent indicated that President Trump will likely make a decision on who he will nominate by the end of the year.

CPI Inflation for September Slightly Below Forecasts but Still Above Target

Image generated by ChatGPT

As we’ve noted in recent blog posts (here and here), the shutdown of the federal government has interrupted the release of government data, including the “Employment Situation” report prepared monthly by the Bureau of Labor Statistics (BLS). The federal government made an exception for the BLS report on the consumer price index (CPI) because annual cost-of-living increases in Social Security payments are determined by the average inflation rate in the CPI during July, August, and September.

Accordingly, today (October 24), the Bureau of Labor Statistics (BLS) released its report on the consumer price index (CPI) for September. 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 3.0 percent in September, up from 2.9 percent in August.
The core inflation rate, which excludes the prices of food and energy, was also 3.0 percent in September, down slightly from 3.1 percent in August.

Headline inflation and core inflation were both slightly lower than the 3.1 rate for both measures that economists had expected.

In the following figure, we look at the 1-month inflation rates 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 the very high rate of 4.7 percent in August to the still high rate of 3.8 percent in September. Core inflation (the red line) declined from 4.2 percent in August to 2.8 percent in September.

The 1-month and 12-month inflation rates are both indicating that inflation remains well above the Fed’s 2 percent annual inflation target in September. Core inflation—which is often a good indicator of future inflation—in particular has been running well above target during the last three months.

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.

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 durable goods—such as furniture, appliances, and cars—which are likely to be affected directly by tariffs, all core goods, and core services. Services are less likely to be affected by tariffs.. To make recent changes clearer, we look only at the months since January 2022. In August, inflation in durable goods declined slightly to 1.8 percent in September from 1.9 percent in August. Inflation in core goods was unchanged in September at 1.5 percent. Inflation in core services fell slightly in September to 3.5 percent from 3.6 percent in August.

The following figure shows 1-month inflation in the prices of these products, which may makes clearer the effects of the tariff increases. In September, durable goods inflation was a high 4.0 percent, although down from 5.1 percent in August. Core goods inflation in September was 2.7 percent, down from 3.4 percent in August. Core service inflation was 2.9 percent in August, down from 4.3 percent in August.

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 September, down slightly from 3.3 August. Twelve-month median inflation (the red line) 3.5 percent in September, down slightly from 3.6 in August.

The following figure shows 1-month trimmed-mean and median inflation. One-month trimmed-mean inflation declined from 3.2 percent in August to 2.4 percent in September. One-month median inflation declined from 3.4 percent in August to 2.4 percent in September. These data are consistent with the view that inflation is still running above the Fed’s 2 percent target.

With inflation running above the Fed’s 2 percent annual target, we wouldn’t typically expect that the Fed’s policymaking Federal Open Market Committee (FOMC) would cut its target for the federal funds rate at its October 28–29 meeting. At this point, though, it seems likely that the FOMC will “look through” the higher inflation rates of the last few months because the higher rates may be largely attributable to one-time price increases caused by tariffs. Committee members have signaled that they are likely to cut their target for the federal funds rate by 0.25 percentage point (25 basis points) at the conclusion of next week’s meeting.

This morning, investors who buy and sell federal funds futures contracts assign a probability of 96.7 percent to the FOMC cutting its target for the federal funds rate at that meeting by 25 basis points from its current target range of 4.00 percent to 4.25 percent. Investors assign a 95.9 percent probability of the committee cutting its target by an additional 25 basis points to 3.50 percent to 3.75 percent at its December 9–10 meeting. If persistently high inflation rates reflect more than just the temporary effects of tariffs, these rate cuts will make it unlikely that the Fed will reach its 2 percent inflation target anytime soon.