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CPI Inflation Comes in Lower than Expected

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There was good news this morning on inflation. (Although maybe not quite good enough to justify the exuberance of the people in the AI-generated image above!) The Bureau of Labor Statistics (BLS) released its report on the consumer price index (CPI) for January. The following figure compares headline CPI inflation (the blue line) and core CPI inflation (the red line). Because of the effects of the federal government shutdown, the BLS didn’t report inflation rates for October or November, so both lines show gaps for those months. (Today’s report was delayed two days by the recent brief government shutdown.)

The headline inflation rate, which is measured by the percentage change in the CPI from the same month in the previous year, was 2.4 percent in January, down from 2.7 percent in December.
The core inflation rate, which excludes the prices of food and energy, was 2.5 percent in January, down from 2.6 percent in December.

Headline inflation was lower than the forecast of economists surveyed by FactSet, while core inflation was at the forecast rate.

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) was 2.1 percent in January, down from 3.6 percent in December. Core inflation (the red line) increased to 3.6 percent in January from 2.8 percent in December.

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

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

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

Many consumers seem worried about inflation in food prices. The following figure shows 1-month inflation in the CPI category “food at home” (the blue bar)—primarily food purchased at groceries stores—and the category “food away from home” (the red bar)—primarily food purchased at restaurants. Inflation in both measures fell in January from the very high leves of December. Food at home increased 2.3 percent in January, down sharply from up from 7.8 percent in December. Food away from home increased 1.8 percent in January, also down sharply from 8.7 percent in December. Again, 1-month inflation rates can be volatile, but the deceleration in inflation in food prices would be a welcome development if it can be sustained in future months.

There was also good news in the falling price of gasoline. The following figure shows 1-month inflation in gasoline prices. In January the price of gasoline fell at an annual rate of 32.2 percent, after having fallen at an annual rate of 4.0 percent in December. As those values imply, 1-month inflation rates in gasoline are quite volatile.

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

One-month inflation in shelter decreased to 2.7 percent in January from 4.7 in December, which is also good news if it can be sustained.

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.) There has been a debate among policymakers and economists as to whether the full effects of tariff increases have already shown up in prices of final goods. In his press conference following the last meeing of the Fed’s Federal Open Market Committee (FOMC), Fed Chair Jerome Powell indicated that he believed that tariffs would cause further price increases later in the year:

“The U.S. economy has pushed right through [the tariff increases]. Partly that is—that the way that what was implemented was significantly less than what was announced at the beginning. In addition, other countries didn’t retaliate, and, in addition, a good part of it hasn’t been passed through to consumers yet. It’s being—it’s being taken by companies that stand between the consumer and the exporter.”

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 12-month inflation in services, which are less likely to be affected by tariffs. In January, inflation in durable goods was 0.4 percent, down from 1.2 percent in December. Inflation in services was 3.2 percent in January, down slightly from 3.3 percent in December. So to this point, upward pressure on goods prices from the tariffs is not reflected in the most recent data.

It’s unlikely that this inflation report will have much effect on the views of the members of the FOMC. The FOMC is unlikely to lower its target for the federal funds rate at its next meeting on March 17–18. The probability that investors in the federal funds futures market assign to the FOMC keeping its target rate unchanged at that meeting declined only slightly from 91.6 percent yesterday to 90.2 percent after the release of today’s inflation report.

December JOLTS Report Shows Possible Labor Market Weakening

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Today (February 5), the Bureau of Labor Statistics (BLS) released its “Job Openings and Labor Turnover” (JOLTS) report for December 2025. The report indicated that labor market conditions may be weakening. The following figure shows that the rate of job openings fell to 3.9 percent in December from 4.2 percent in November. The rate was 4.5 percent in October. The job openings rate is the lowest since April 2020, at the start of the Covid pandemic. We should note the usual caveat that the monthly JOLTS data is subject to potentially large revisions as the BLS receives more complete data.

(The BLS defines a job opening as a full-time or part-time job that a firm is advertising and that will start within 30 days. The rate of job openings is the number of job openings divided by the number of job openings plus the number employed workers, multiplied by 100.)

In the following figure, we show a measure of the state of the labor market that economists frequently use: the total number of job openings to the total number of people unemployed. In December there were 0.87 job openings per unemployed person, the lowest value for that measure since March 2021, during the recovery from the pandemic. The value was 1.0 in September. (Note that data for October and November are unavailable because the data weren’t collected during the shutdown of the federal government from October 1 to November 12 last year.) The value for December is well below the 1.21 job openings per employed person in February 2020, just before the pandemic. (Note that, as we discussed in this blog post, the employment-population ratio for prime age workers, which many economists consider a key measure of the state of the labor market, rose in December, putting it above what the ratio was in any month during the period from January 2008 to February 2020.)

The rate at which workers are willing to quit their jobs is an indication of how they perceive the ease of finding a new job. As the following figure shows, the quit rate declined slowly from a peak of 3 percent in late 2021 and early 2022 to 2.0 percent in August 2024, the same value as in December 2025. That rate is below the rate during 2019 and early 2020. By this measure, workers’ perceptions of the state of the labor market have remained remarkably stable over the last year and a half.

Overall, this JOLTS report is consistent with what some economists have labeled a “slow hire, slow fire” labor market. Fed Chair Jerome Powell’s remarks at his press conference following the last meeting of the Federal Open Market Committee (FOMC) indicates that Fed policymakers share this view, which Powell believes complicates monetary policymaking:

“So there are lots of … little places that suggest that the labor market has softened, but part of … payroll job softening is that both the supply and demand for labor has come down … growth in those two have come down. So that makes it a difficult time to read the labor market. So, imagine they both came down a lot, to the point where there is no job growth. Is that full employment? In a sense it is. If demand and supply are … in balance, you could say that’s full employment. At the same time, is it—do we really feel like … that’s a maximum employment economy? It’s a challenging—it’s very challenging and quite unusual situation.”

The BLS was scheduled to release its monthly “Employment Situation” report (often called the “jobs report”) for January 2026 tomorrow. Because of the temporary lapse in funding that began Saturday, the report will instead be released next Wednesday, February 11. That report will provide additional data on the state of the labor market. (Note that the data in the JOLTS report lag the data in the “Employment Situation” report by one month.)

President Trump Nominates Kevin Warsh to be Fed Chair

Photo of Kevin Warsh from Bloomberg News via the Wall Street Journal

This morning, President Trump ended the suspense over who he would nominate for Chair of the Board of Governors of the Federal Reserve by choosing Kevin Warsh. Warsh was considered one of the four finalists, along with Kevin Hassett, director of the National Economic Council, Fed Governor Christopher Waller, and Rick Rieder, who is an executive at BlackRock, an investment firm.

Warsh had been appointed to the Board of Governors in 2006 by President George W. Bush. Warsh was the youngest person ever appointed to the Board and served from 2006 to 2011. He is generally credited with having been heavily involved in formulating policy during the Great Financial Crisis of 2007–2009. He, along with Fed Chair Ben Bernanke, Fed Governor Donald Kohn, and New York Fed President Timothy Geithner were labeled the “four musketeers” of monetary policy during that period. (We discuss the reasons why during that period Bernanke relied on a small group for policymaking in Money, Banking, and the Financial System, Chapter 13.)

Warsh had been considered an inflation hawk, which would indicate that he would be in favor of keeping the target for the federal funds relatively high until inflation returns to the Fed’s 2 percent annual target and would also want to shrink the Fed’s balance sheet by continuing quantitative tightening (QT). Warsh’s current views are summarized in an op-ed he wrote for the Wall Street Journal in November titled” The Federal Reserve’s Broken Leadership” (a subscription may be required). In that op-ed, Warsh seems to advocate that the Federal Open Market Committee (FOMC) should be lowering its target for the federal funds rate more quickly. Presumably, Warsh’s views on appropriate monetary policy will be discussed at his confirmation hearing.

Assuming that Warsh has sufficient support in the Senate to be confirmed there remains the question of which seat on the Board of Governors he will fill. Current Chair Jerome Powell’s term as chair expires on May 15, 2026. If Powell follows recent precedent, he will step down when his term as chair ends, providing an open seat that Warsh can fill. But Powell’s term as a Fed governor doesn’t end until January 31, 2028, so he could chose to remain on the board until that time. If Powell doesn’t step down, Warsh would presumably fill the seat currently occupied by Stephen Miran, whose term technically ends tomorrow (January 31). Miran will likely remain on the board until Warsh is confirmed.

The Wall Street Journal printed a useful graphic showing the current membership of the board. Powell is listed with the Presidents Obama and Biden’s appointees because he was first appointed to the board by President Obama in 2012. But Powell was appointed as Fed chair by President Trump in 2018. He was reappointed as chair by President Biden in 2022. If Powell steps down from the board when Warsh is confirmed and if Miran is appointed to another term, or if he steps down and President Trump appoints someone else to that seat, President Trump will have appointed a majority of board members. It’s worth remembering that 5 Fed District Bank presidents vote at each meeting of the FOMC (all 12 District Bank presidents attend each meeting) and that District Bank presidents are not appointed by the U.S. president.

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

Photo of Fed Chair Jerome Powell from federalreserve.gov

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Statement on the Federal Reserve

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

SIGNATORIES

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Good evening.

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

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

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

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

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

Thank you.

CPI Inflation Slows but Some Data Are Missing from Latest Report

Image generated by ChatGPT

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

Image created by ChatGPT

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.