How inflation, labor market fare will determine if Fed lowers interest rates
Amid a complex economy, focusing on fundamentals helps to frame my thinking as I formulate monetary policy.
First, how is the Federal Open Market Committee faring relative to the goals Congress assigned us — price stability and maximum employment? How will the economy evolve with respect to the two core objectives?
There’s much to consider. Ultimately, though, the decision comes down to which is the greater risk: rising inflation or a deteriorating labor market.
The answer is often not clear-cut; the relative risks fall on a spectrum. Therefore, I must determine where I think we are on that spectrum of risk.
To do that, I size up economic conditions and synthesize input from around the Sixth Federal Reserve District about how people are experiencing the economy. The Sixth District covers Alabama, Florida, and Georgia, and portions of Louisiana, Mississippi and Tennessee.
Tariff effect on consumer prices won’t fade fast
Start with inflation. The personal consumption expenditures price index has exceeded our 2% target for four years. After substantial declines in the inflation rate, progress stalled last fall. The PCE rate was 2.6% in July.
An important culprit: Prices of core services, those not tied to energy, have lingered above pre-pandemic averages. Now goods prices are also increasing, partly because of tariffs. For context, tariff rates across all U.S. imports average 15% to 18%, compared to 2% at the end of 2024.
The puzzle is whether the inflationary effects of tariffs will last. Based on research and input from business leaders, I believe the effects of tariffs on consumer prices won’t fade fast and, in fact, will not fully materialize for some months.
I’m also concerned about inflation expectations. If businesses or households believe prices will remain elevated for many months, then that can influence behavior in ways that lead to persistent inflation. Broadly speaking, inflation expectations have not yet risen alarmingly, though they generally are above the 2% inflation target.
In total, these numbers give me pause. I won’t assume expectations will remain anchored and another inflation outbreak won’t happen. So, I am closely monitoring developments regarding expectations.
Businesses are not yet sounding the alarm on the job market
Meanwhile, the labor market has cooled sufficiently that risks to the two mandated goals are likely coming closer to balanced. Monthly employment growth slowed significantly in the spring and summer, and for some time, it’s been overly concentrated in just a couple of sectors, notably health care.
Nevertheless, I don’t think it is completely clear that the labor market is weakening materially relative to our mandated objectives.
For one, business contacts are not sounding alarms. Second, labor supply has declined by about 400,000 people since January, so the unemployment rate has remained steady at just over 4% through spring and summer. With fewer people working or seeking work, the number of jobs the economy must produce each month to keep the unemployment rate stable is lower than in recent years.
My takeaway on the labor market: If demand and supply are both slowing such that the unemployment rate is steady, then the labor market has not meaningfully weakened and remains near the Committee’s maximum employment objective.
Still, signs of cooling bear scrutiny, as history tells us that the job market can turn quickly and decisively.
Some easing in monetary policy will be appropriate over the remainder of this year
Ultimately, my monetary policy calculation comes down to this. If the risk of inflation outweighs the risk of a weak job market, then the committee probably wants restrictive policy that will curb inflation. If the greater risk is to the job market, then we may want rates a bit lower to support employment.
If the risks to both sides of the mandate are equal, then we might want the federal funds rate to be at or near neutral, a stance that neither restricts nor stimulates economic activity. It’s also worth noting that Fed policy influences short-term rates. Longer-term rates — on 30-year mortgages, for example — don’t always move in lock step with the federal funds rate.
Today, I judge policy to be marginally restrictive. While price stability remains the primary concern, the labor market is slowing enough that I believe some easing in policy — probably around 0.25 percentage points — will be appropriate over the remainder of 2025. That could change, though, depending on the course of inflation and employment. I remain data dependent, after all.
The Fed’s dual mandate is unusual. If we pursued only price stability, like most central banks, then the committee would be unconcerned with the employment implications of monetary policy. Lowering the federal funds rate in this environment would be out of the question. The dual mandate, however, demands that we weigh difficult trade-offs. And so we do.
Raphael Bostic is the president and chief executive officer of the Federal Reserve Bank of Atlanta. This guest opinion column was adapted from a Sept. 3 essay published on AtlantaFed.org.
