Money. Banking, and the Financial System – Page 3 – HubbardOBrienEconomics.com Blog

CPI Inflation for September Slightly Below Forecasts but Still Above Target

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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.

Fed Has Apparently Lost Early Access to ADP Employment Data

Fed Governor Christopher Wallace on October 21, 2025 at the Fed’s Payment Innovation Conference (photo from federalreserve.gov)

The current partial shutdown of the federal government has delayed the release by the Bureau of Labor Statistics (BLS) of its “Employment Situation” report (often called the “jobs report”). The report had originally been scheduled to be released on October 3. In a recent blog post we discussed how well the employment data collected by the private payroll processing firm Automatic Data Processing (ADP) serves as an alternative measure of the state of the labor market. In that post we showed that ADP data on total private payroll employment tracks fairly well the BLS data on total private employment from its establishment survey (often called the payroll survey) .

An article in today’s Wall Street Journal reports that ADP has stopped providing the Fed with early access to its data. Apparently, as a public service ADP had been providing its data to the Fed a week before the data was publicly released. The article notes that ADP stopped providing the data soon after this speech delievered by Fed Governor Christopher Wallace in late August. In a footnote to the speech Wallace refers to “data that Federal Reserve staff maintains in collaboration with the employment services firm ADP.” The article points out, though, that Waller’s speech was only one of several times since 2019 that a Fed official has publicly mentioned receiving data from ADP.

Losing early access to the ADP data comes at a difficult time for the Fed, given that the BLS employment data are not available. In addition, the labor market has shown signs of weakening even though growth has remained strong in measures of output. If payroll employment has been falling, rather than growing slowly as it was in the August jobs report, that knowledge would affect the deliberations of the Fed’s policymaking Federal Open Market Committee (FOMC) at its next meeting on October 28–29. Serious deterioration in the labor market could lead the FOMC to cut its target for the federal funds rate by more than the expected 0.25 percentage point (25 basis points).

In a speech in 2019, Fed Chair Jerome Powell noted that the Fed staff had used ADP data to develop a new measure of payroll employment. Had that measure been available in 2008, Powell argued, the FOMC would have realized earlier than it did that employment was being severely affected by the deepening of the financial crisis:

“[I]n the first eight months of 2008, as the Great Recession was getting underway, the official monthly employment data showed total job losses of about 750,000. A later benchmark revision told a much bleaker story, with declines of about 1.5 million. Our new measure, had it been available in 2008, would have been much closer to the revised data, alerting us that the job situation might be considerably worse than the official data suggested.”

The Wall Street Journal article notes that Powell has urged ADP to resume sharing its employment data with the Fed.

Buy Stablecoins and Receive … a Free Toaster?

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Beginning in 1933, under the Federal Reserve’s Regulation Q, commercial banks were prohibited from paying interest on checking account deposits. As we discuss in Money, Banking, and the Financial System, Chapter 12, Section 12.4, in 1980 Congress allowed banks to pay interest on Negotiable Order of Withdrawal (NOW) accounts. Because NOW accounts effectively functioned as checking accounts, many people moved funds out of checking accounts and into NOW accounts.

Once NOW accounts were available, a bank could try to attract deposits by offering higher interest rates. But what did a bank do to attract deposits prior to 1980 when it couldn’t legally pay interest? Many banks offered rewards, such as toasters, clock radios, or other small appliances, to people who opened a new checking account or made a large deposit. Banks heavily advertised these rewards on television and radio and in newspapers. The 1960s and 1970s are sometimes called “the free-toaster era” in banking. For example, in 1973, the Marquette National Bank placed this advertisement in a local Minneapolis newspaper offering a variety of gifts to anyone depositing $250 or more in a checking account.

In 1977, a bank in Morton Grove, Illinois offered candy bowls and ashtrays to people opening new accounts.

Congress authorized NOW accounts because as interest rates rose during the 1970s—despite the offers of free gifts—banks were losing deposits to money market mutual funds and other short-term financial assets such as Treasury bills. Today, banks are afraid that they will lose deposits to cryptocurrencies, particularly stablecoins. As we discuss in this blog post, stablecoins are a type of cryptocurrency—bitcoin is the best-known cryptocurrency—that can be bought and sold for a constant number of units of a currency, usually U.S. dollars. Typically, one stablecoin can be exchanged for one dollar.

In July 2025, Congress passed and President Trump signed the Guiding and Establishing National Innovation for U.S. Stablecoins Act (Genius Act) to provide a regulatory framework for stablecoins. Firms issuing stablecoins earn income on the assets, such as Treasury bills and money market funds that invest in Treasury bills, that they are required to hold to back the stablecoins they issue. But a provision of the Act bars issues of stablecoins from paying interest to holders of stablecoins. So, stablecoin issuers can’t copy the strategy of banks by paying interest to attract deposits and funding the interest on deposits with the interest earnings on their assets.

To this point, few people are buying stablecoins unless they intend to use them in buying and selling bitcoin and other cryptocurrencies or unless they need a convenient way to transfer funds across national borders. Some of these international transfers are related to drug dealing and other illegal activities. Because few retail firms—either brick-and-mortar or online—are equipped to accept stablecoins in payment for goods and services, and because stablecoins pay no interest, most households and firms don’t see stablecoins as good substitutes for checking accounts in banks.

As we discuss in Chapter 12 of Money, Banking, and the Financial System, when the federal government adopts new financial regulations, like the Genius Act, financial firms often respond by attempting to evade the regulations. People buy and sell cryptocurrencies on exchanges, such as Coinbase. Circle issues the stablecoin USDC and has agreed to pay Coinbase some of the interest it earns on Circle’s assets. As the following screenshot from the Coinbase site shows, Coinbase offers to pay interest to anyone who holds USDC on the Coinbase site.

An article in the Wall Street Journal notes that: “The result is something that critics say looks a lot like a yield-bearing stablecoin. Coinbase says the reward program is separate from its revenue-sharing deal with Circle.” If other stablecoins attract funds by offering interest payments in this indirect way and if more retailers begin to accept stablecoins as payment for goods and services—which they have an incentive to do to avoid the 1 percent to 3 percent fee that credit card issuers charge retailers on purchases—banks stand to lose trillions in deposits.

Smaller banks, often called community banks, might be most at risk from deposit outflows because they are more reliant on deposits to fund their investments than are larger banks. As we discuss in Money, Banking, and the Financial System, Chapter 9, community banks practice relationship banking by using private information to assess the credit risk involved in lending to local borrowers, such as car dealers and restaurants. Many large banks believe that the transaction costs involved in evaluating risk on small business loans make such loans unprofitable. So the disappearance of many community banks may make it more difficult for small businesses to access the credit they need to operate.

The Bank Policy Institute (BPI), which lobbies on behalf of the banking industry, argues that:

“Stablecoin issuers want to engage in banking activities, like paying interest. Being a bank requires the full suite of regulatory requirements, deposit insurance and discount window access that keep banks safe. Stablecoins seeking to offer banking services must be subject to those requirements and protections, rather than using workarounds and backdoors to pay interest, take deposits and access the federal payment rails.”

BPI urges Congress to eliminate the ability of Coinbase and other crypto exhanges to help stablecoin issuers evade the prohibition on paying interest.

If the prohibition on stablecoin issuers paying interest is tightened, how else might issuers attract people to invest in stablecoins? Well, there’s always free toasters!

The Federal Government Runs Another Large Budget Deficit in Fiscal Year 2025

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The federal government’s fiscal year runs from October 1 to September 30. Today (October 8), the Congressional Budget Office (CBO) released its estimate of the deficit for the fiscal year ending September 30, 2025. The deficit fell slightly from $1,817 billion in 2024 to $1,809 in 2025. As the following figure shows, the budget deficit in 2025 remains very large, particularly at a time when the U.S. economy is at or very close to full employment, although well below the record deficit of $3,133 billion in 2020.

The following table from the CBO report shows that in 2025 federal receipts increased slightly more than federal outlays, leading to a slightly smaller deficit.

The next table shows the changes in the major categories of federal receipts. Individual income and payroll taxes—which fund the Social Security and Medicare programs, as well as the federal government’s contributions to state unemployment insurance plans—both increased, while corporate income tax receipts fell. The biggest change was in custom duties, which more than doubled following the Trump administration’s sharp increase in tariff rates beginning on April 2.

The next table shows the changes in the major categories of federal outlays. Spending on the Social Security, Medicare (health insurance for older people), and Medicaid (health insurance for lower-income people) programs continue to rapidly increase. Spending on Medicare is now more than $100 billion greater than spending on defense. Interest on the public debt continues to increase as the debt increases and interest rates remain well above their pre-2021 levels.

No BLS Jobs Report Today. Are ADP’s Data a Good Substitute?

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Ordinarily, on the first Friday of a month the Bureau of Labor Statistics (BLS) releases its “Employment Situation” report (often called the “jobs report”) containing data on the labor market for the previous month. There was no jobs report today (October 3) because of the federal government shutdown. (We discuss the shutdown in this blog post.)

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 and unemployment data.

Economists surveyed had forecast that today’s payroll survey would have shown a net increase of 51,000 jobs in September. When the shutdown ends, the BLS will publish its jobs report for September. Until that happens, employment data collected by the private payroll processing firm Automatic Data Processing (ADP) provides an alternative measure of the state of the labor market. ADP data covers only about 20 percent of total private nonfarm employment, but ADP attempts to make its data more consistent with BLS data by weighting its data to reflect the industry weights used in the BLS data.

How closely does ADP employment data track BLS payroll data? The following figure shows the ADP employment series (blue line) and the BLS payroll employment data (red line) with the values for both series set equal to 100 in January 2010. The two series track well with the exception of April and May 2020 during the worst of the pandemic. The BLS series shows a much larger decline in employment during those months than does the ADP series.

The next figure shows the 12-month percentage changes in the two series. Again, the series track fairly well except for the worst months of the pandemic and—strikingly—the month of April 2021 during the economic recovery. In that month, the ADP series increases by only 0.6 percent, while the BLS series soars by 13.1 percent.

Finally, economists, policymakers, and investors usually focus on the change in payroll employment from the previous month—that is, the net change in jobs—shown in the BLS jobs report. The following figure shows the net change in jobs in the two series, starting in January 2021 to avoid some of the largest fluctuations during the pandemic.

Again, the two series track fairly well, although the BLS data is more volatile. The ADP data show a net decline of 32,000 jobs in September. As noted earlier, economists surveyed were expecting a net increase of 51,000 jobs. During the months from May through August, BLS data show an average monthly net increase in jobs of only 39,250. So, whether the BLS number will turn out to be closer to the ADP number or to the number economists had forecast, the message would be the same: Since May, employment has grown only slowly. And, of course, as we’ve seen this year, whatever the BLS’s initial employment estimate for September turns out to be, it’s likely to be subject to significant revision in coming months. (We discuss why BLS revisions to its initial employment estimates can be substantial in this post.)

Real GDP Growth Revised Up and PCE Inflation Running Slightly Below Expectations

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Today (September 26), the Bureau of Economic Analysis (BEA) released monthly data on the personal consumption expenditures (PCE) price index as part of its “Personal Income and Outlays” report. Yesterday, the BEA released its revised estimate of real GDP growth in the second quarter. Taken together, the two reports show that economic growth remains realtively strong and that inflation continues to run above the Fed’s 2 percent annual target.

Taking the inflation report first, 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 2018, with inflation measured as the percentage change in the PCE from the same month in the previous year. In August, headline PCE inflation was 2.7 percent, up from 2.6 percent in July. Core PCE inflation in August was 2.9 percent, unchanged from July. Headline PCE inflation was equal to the forecast of economists surveyed, while core PCE inflation was slightly lower than 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 increased from 2.0 percent in July to 3.2 percent in August. Core PCE inflation declined slightly from 2.9 percent in July to 2.8 percent in August. So, both 1-month and 12-month PCE inflation are telling the same story of inflation being well 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 likely reflect higher prices resulting from the tariff increases the Trump administration has implemented. Once the one-time price increases from tariffs have worked through the economy, inflation may decline. It’s not clear, however, how long that may take and President Trump indicated yesterday that he may impose new tariffs on pharmaceuticals, large trucks, and furniture.

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 2.4 percent in August, unchanged from July. Core market-based PCE inflation was 2.6 percent in August, also unchanged from July. 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 2.5 percent in August from 0.9 percent in July. One-month core market-based inflation increased slightly to 1.9 percent in August from 1.8 percent in July. 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.

Inflation running above the Fed’s 2 percent target is consistent with relatively strong growth in real GDP. The following figure shows compound annual rates of growth of real GDP, for each quarter since the first quarter of 2023. The value for the second quarter of 2025 is the BEA’s third estimate. This revised estimate increased the growth rate of real GDP to 3.8 percent from the second estimate of 3.3 percent.

The most important contributor to real GDP growth was growth in real personal consumption expenditures, which, as shown in the following figure, increased aat compound annual rate of 2.5 percent in the second quarter, up from 0.6 percent in the first quarter.

High interest rates continue to hold back residential construction, which declined by a compound annual rate of 5.1 percent in the second quarter after declining 1.0 percent in the first quarter.

Business investment in structures, such as factories and office buildings, continued a decline that began in the first quarter of 2024.

Will the relatively strong growth in real GDP in the second quarter continue in the third quarter? 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 is for real GDP to grow at an annual rate of 3.9 percent in the third quarter.

Finally, the macroeconomic data released in the last two days has had realtively little effect on the expectations of investors trading federal funds rate futures. Investors assign an 89.8 percent probability to the Federal Open Market Committee (FOMC) cutting its target for the federal funds rate at its meeting on October 28–29 by 0.25 percentage point (25 basis points) from its current range of 4.00 percent to 4.25 percent. That probability is only slightly lower than 91.9 percent probaiblity that investors had assigned to a 25 basis point cut a week ago. However, the probability of the committee cutting its target rate by another 25 basis points at its December 9–10 fell to 67.0 percent today from 78.6 percent one week ago.

Unusual FOMC Meeting Leads to Expected Result of Rate Cut

Photo of Fed 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 President Trump pressuring the committee to reduce its target for the federal funds rate. In a controversial move, Trump nominated Stephen Miran, chair of Council of Economic Advisers (CEA), to fill an open seat on the Fed’s Board of Governors. Miran took a leave of absence from the CEA rather than resign his position, which made him the first member of the Board of Governors in decades to maintain an appointment elsewhere in the executive branch while serving on the Board. In addition, Trump had fired Governor Lisa Cook on the grounds that she had committed fraud in applying for a mortgage at a time before her appointment to the Board. Cook denied the charge and a federal appeals court sustained an injunction allowing her to participate in today’s meeting.

As most observers had expected, the committee decided today to lower its target for the federal funds rate from a range of 4.25 percent to 4.50 percent to a range of 4.00 percent to 4.25 percent—a cut of 0.25 percentage point, or 25 basis points. The members of the committee voted 11 to 1 for the 25 basis point cut with Miran dissenting because he preferred a 50 basis point cut.

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).)

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:

Committee members slightly increased their forecasts of real GDP growth for each year from 2025 through 2027. Committee members also slightly decreased their forecasts of the unemployment rate in 2026 and 2027. They left their forecast of unemployment in the fourth quarter of 2025 unchanged at 4.5 percent. (The unemployment rate in August was 4.3 percent.)
Committee members left their forecasts for personal consumption expenditures (PCE) price inflation unchanged for 2025 and 2026, while raising their forecast for 2026 from 2.4 percent to 2.6 percent. Similarly, their forecasts of core PCE inflation were unchanged for 2025 and 2027 but increased from 2.4 percent to 2.6 percent for 2026. The committee does not expect that PCE inflation will decline to the Fed’s 2 percent annual target until 2028.
The committee’s forecast of the federal funds rate at the end of 2025 was lowered from 3.9 percent in June to 3.6 percent today. They also lowered their forecast for federal funds rate at the end of 2026 from 3.6 percent to 3.4 pecent and at the end of 2027 from 3.4 percent to 3.1 percent.

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 of each of the 19 members of the value of the federal funds rate at the end of 2025. Ten of the 19 members expect that the committee will cut its target range for the federal funds rate by at least 50 basis points in its two remaining meetings this year. That narrow majority makes it likely that an unexpected surge in inflation during the next few months might result in the target range being cut by only 25 basis points or not cut at all. Members of the business press and financial analysts are expecting tht the committee will implement a 25 basis point cut in each of its last two meetings this year.

During his press conference following the meeting, Powell indicated 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 causing a long-term increase in the inflation rate. Powell also noted recent slow growth in real GDP and employment. (We discuss the recent employment data in this blog post.) 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.

The next FOMC meeting is on October 28–29 by which time the status of Lisa Cook on the committee may have been clarified. 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 Fed chairs typically resign from the Board if they aren’t reappointed as chair). And, of course, additional data on inflation and unemployment will also have been released.

CPI Inflation Worsens, as Expected

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Today (September 11), the Bureau of Labor Statistics (BLS) released its report on the consumer price index (CPI) for August. 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 2.9 percent in August, up from 2.7 in July.
The core inflation rate, which excludes the prices of food and energy, was 3.1 percent in August, up slightly from 3.0 percent in July.

Headline inflation and core inflation were both the same as 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) jumped from 2.4 percent in July to 4.7 percent in August. Core inflation (the red line) increased from 3.9 percent in July to 4.2 percent in August.

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

Core inflation had been running significantly higher than headline inflation in the past few months because gasoline prices had generally been falling since February. Gasoline prices turned around in August, however, increasing at a 25.5 percent annual rate. 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 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 August, inflation in durable goods increased to 1.9 percent from 1.2 percent in July. Inflation in services in August was 3.8 percent, unchanged from July.

The following figure shows 1-month inflation in the prices of these products, which may make the effects of tariffs clearer. In August, durable goods inflation was 5.1 percent up from 4.5 percent in July. Service inflation was 3.9 percent in August, down slightly from 4.0 percent in July. Inflation in goods and services both running well above 2 percent is not good news for inflation falling back to the Fed’s 2 percent target in the near future.

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 3.3 percent in August, up slightly from 3.2 July. Twelve-month median inflation (the red line) 3.6 percent in August, unchanged from July.

The following figure shows 1-month trimmed-mean and median inflation. One-month trimmed-mean inflation rose from 2.9 percent in July to 3.2 percent in August. One-month median inflation remained unchanged at 3.4 percent in August. These data are consistent with the view that inflation is running above the Fed’s 2 percent target.

The CPI inflation data combined with the recent jobs data (which we discuss here and here), indicate that the U.S. economy may be entering a period of stagflation—a combination of rising inflation with falling, or stagnating, output. Stagflation poses a policy dilemma for the Fed’s policymaking Federal Open Market Committee (FOMC) because cutting its target for the federal funds rate to increase economic growth and employment may worsen inflation. At this point, it seems likely that the FOMC will “look through” this month’s rising inflation because it may be largely due 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 percent (25 basis points) at the conclusion of their meeting on September 16–17 and again at the conclusion of the following meeting on October 28–29.

Where Did 911,000 Jobs Go?

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Today (September 9), the Bureau of Labor Statistics (BLS) issued revised estimates of the increase in employment, as measured by the establishment survey, over the period from April 2024 through March 2025. The BLS had initially estimated that during that period net employment had increased by a total of 1,758,000 or an average of 147,000 jobs per month. The revision lowered this estimate by more than half to a total of 839,000 jobs or an average of only 70,000 net new jobs created per month. The difference between those two monthly averages means that the U.S. economy had generated a total of 919,000 fewer jobs during that period. The revision was larger than the downward revision of 800,000 jobs forecast by economists at Wells Fargo, Comerica Bank, and Pantheon Macroeconomics.

Why does the BLS have to revise its employment estimates? As we discuss in Macroeconomics, Chapter 9, Section 9.1 (Economics, Chapter 19, Section 19.1) the initial estimates that the BLS issues each month in its “Employment Situation” reports are based on a sample of 121,000 businesses and government agencies representing 631,000 worksites or “establishments.” The monthly data also rely on estimates of the number of employees at establishments that opened or closed during the month and on employment changes at establishments that failed to respond to the survey. In August or September of each year, the BLS issues revised employment estimates based on data from the Quarterly Census of Employment and Wages (QCEW), which relies on state unemployment insurance tax records. The unemployment tax records are much more comprehensive than the original sample of establishments because nearly all employers are included.

In today’s report, the BLS cited two likely sources of error in their preliminary estimates:

“First, businesses reported less employment to the QCEW than they reported to the CES survey (response error). Second, businesses who were selected for the CES survey but did not respond reported less employment to the QCEW than those businesses who did respond to the CES survey (nonresponse error).”

The preliminary benchmark estimates the BLS released today will be revised again and the final estimates for these months will be released in February 2026. The difference between the preliminary and final benchmark estimates can be substantial. For example, last year, the BLS’s initially preliminary benchmark estimate indicated that the net employment increase from April 2023 to March 2024 had been overestimated by 818,000 jobs. In February 2025, the final benchmark estimate reduced this number to 598,000 jobs.

Although this year’s revision is particularly large in absolute terms—the largest since at least 2001—it still represents only about 0.56 percent of the more than 159.5 million people employed in the U.S. economy. Still the size of this revision is likely to increase political criticism of the BLS.

How will this revision affect the decision by the Federal Open Market Committee (FOMC) at its next meeting on September 16-17 to cut or maintain its target for the federal funds rate? The members of the committee were probably not surprised by the downward revision in the employment estimates, although they may have anticipated that the revision would be smaller. In six of the past seven years, the BLS has revised its estimates of payroll employment downward in its annual preliminary benchmark revision.

As we noted in this recent post, even before the BLS revised its employment estimates downward, recent monthly net employment increases were well below the increases during the first half of the year. There was already a high likelihood that the FOMC intended to cut its target for the federal funds rate at its meeting on September 16–17. The substantial downward revision in the employment data makes a cut at the September meeting nearly a certainty and increases the likelihood that the FOMC will implement a second cut in its target for the federal funds rate at the committee’s meeting on October 28–29.

Weak Jobs Report Provides Further Evidence of Labor Market Softening

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This morning (September 5), the Bureau of Labor Statistics (BLS) released its “Employment Situation” report (often called the “jobs report”) for August. The data in the report show that the labor market was weaker than expected in August.

According to the establishment survey, there was a net increase of only 22,000 nonfarm jobs during August. This increase was well below the increase of 110,000 that economists surveyed by FactSet had forecast. Economists surveyed by the Wall Street Journal had forecast a smaller increase of 75,000 jobs. In addition, the BLS revised downward its previous estimates of employment in June and July by a combined 21,000 jobs. The estimate for June was revised from a net gain of 14,000 to a net loss of 13,000. This was the first month with a net job loss since December 2020. (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 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 increased from 4.2 percent in July to 4.3 percent in August, the highest rate since October 2021. The unemployment rate is above the 4.2 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. In June, 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 unemployment rate would still have to rise significantly 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 97,591 net new jobs each month to keep the unemployment rate stable at 4.3 percent. If this estimate is accurate, continuing monthly net job increases of 22,000 would result in a 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 288,000 jobs in August, following a net decrease of 260,000 jobs in July. 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 August the ratio rose to 80.7 percent from 8.4 percent in July. 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 bright spot in this month’s jobs report.

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 15,000 in August 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 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 3.7 percent in August, down from an increase of 3.9 percent in July.

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 August, the 1-month rate of wage inflation was 3.3 percent, down from 4.0 percent in July. This slowdown in wage growth may be another 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 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.) As we’ve noted in earlier blog posts, since the weak July jobs report, investors have assigned a very high probability to the committee cutting its target by 0.25 percentage point (25 basis points) from its current range of 4.25 percent to 4.50 percent at its September 16–17 meeting. This morning, as the following figure shows, investors raised the probability they assign to a 50 basis point reduction at the September meeting from 0 percent to 14.2 percent. Investors are also now assigning a 78.4 percent probability to the committee cutting its target range by at least an additional 25 basis points at its October 28–29 meeting.