Possible reduction in interest rates by the Federal Reserve in September may be uncertain.
The Federal Reserve, the central banking system of the United States, is keeping a close watch on the economy as it navigates through a complex economic landscape.
According to the Survey of Professional Forecasters, compiled by the Federal Reserve Bank of Philadelphia, unemployment is predicted to rise to 4.5% by mid-2026. However, it's worth noting that the Congressional Budget Office estimates the natural rate of unemployment to be slightly lower at 4.3%.
The Fed's preferred measure of inflation, the Personal Consumption Expenditures Excluding Food and Energy, has consistently fallen short of its target of 2%. This persistent gap between the target and the actual inflation rate is a concern for the Fed.
Currently, voluntary quits and layoffs are at a steady level, with hires slightly down. Despite this, the unemployment rate has remained relatively stable over the past 12 months, most recently at 4.2%.
The Fed's focus on inflation is rooted in the belief that low and steady inflation rates contribute to low and steady unemployment. However, tariffs pose a challenge in this calculation, as they complicate the inflation picture. The Fed is considering ignoring changes in prices caused by tariffs to maintain its focus on broader economic trends.
Economic forecasts, while valuable, should not be over-reliied upon. The Fed believes that current interest rates are restrictive, and if no action is taken, the economy could slow down. On the other hand, a quarter-point cut in the overnight interest rate may not make a significant impact, but a series of such cuts could.
The total number of people filing for unemployment insurance is currently unusually low, which is a positive sign for the labor market's stability. Actual GDP is less than one percent below its potential, representing an unusually low spread.
Recent calculations suggest that prices might have increased by 0.6% due to tariffs. Sellers may have cut prices by about half the tariff so far, but this reduction is unlikely to be sustainable in the long run.
In the long run, there is no inflation-unemployment tradeoff, and low inflation is essential for a healthy labor market. Economists have found that low and steady inflation rates bring about low and steady unemployment.
Looking ahead, the seven readings of inflation in 2025 are expected to fall within the range of 2.6% to 2.9%. While this is still above the Fed's target, it represents a step towards achieving the desired inflation rate.
Overall, the economy is in a relatively good shape at the moment, with the labor market showing signs of stability. However, the Fed is keeping a vigilant eye on inflation and unemployment rates, ready to adjust its monetary policy as needed to maintain a balanced and healthy economy.
