Inflation Is Trending Higher and the Fed Is Going to Cut the FF Rate on September 17
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Chart 1 shows that no matter how you slice it and dice it, consumer price inflation is trending higher. In the three months ended August 2025, the annualized rate of consumer inflation has ranged from 3.3% (FRB Cleveland 16% Trimmed Mean) to 3.65% (CPI excluding food and energy components). Again, consumer inflation is trending higher.
Chart 1
And yet, on Wednesday, September 17, the Federal Open Market Committee, with or without Governor Cook, will vote to cut the federal funds rate, which now stands at 4.33%, by at least 25 basis points. Why? Ostensibly, because the labor market is weakening. The recent subject-to-large-revisions nonfarm payrolls data certainly suggest that the labor market is weakening. As shown in Chart 2, in the three months ended August 2025, the change in total nonfarm payrolls increased by only 88 thousand (the red bars). There is some question as to how much nonfarm payrolls are being affected by the crackdown on undocumented workers and on southern border crossings. Moreover, the imposition of tariffs by the US government may have reduced employment in some sectors. The recent subject-to-small-revisions continuing unemployment claims data also suggest that there has been a weakening in the labor market, but that weakening has diminished in the past three months. In the three months ended August 2025, the change in continuing unemployment claims was 36 thousand compared with 86 thousand in the three months ended June 2025 (the blue line). So, yes, the labor market does appear to be weakening, but weakening enough to warrant a cut in the federal funds rate?
Chart 2
All else the same, a cut in the federal funds rate would result in an increase in the sum of the monetary base and bank credit. As Chart 3 shows, the eight-month annualized growth in this sum as of August 2025 was 5.62%, the fastest growth eight-month annualized growth since March 2022. Let me remind you that growth in this monetary quantity leads growth in goods/services price inflation by about two years. I realize that two years into the future seems like infinity in terms of financial market psychology, but with consumer inflation already trending higher and ambiguity as to the causes of the recent weakening in the labor market, is now the time for the Fed to cut the federal funds rate?
Chart 3
Paul L. Kasriel
AuthorMore in Author Profile »Mr. Kasriel is founder of Econtrarian, LLC, an economic-analysis consulting firm. Paul’s economic commentaries can be read on his blog, The Econtrarian. After 25 years of employment at The Northern Trust Company of Chicago, Paul retired from the chief economist position at the end of April 2012. Prior to joining The Northern Trust Company in August 1986, Paul was on the official staff of the Federal Reserve Bank of Chicago in the economic research department. Paul is a recipient of the annual Lawrence R. Klein award for the most accurate economic forecast over a four-year period among the approximately 50 participants in the Blue Chip Economic Indicators forecast survey. In January 2009, both The Wall Street Journal and Forbes cited Paul as one of the few economists who identified early on the formation of the housing bubble and the economic and financial market havoc that would ensue after the bubble inevitably burst. Under Paul’s leadership, The Northern Trust’s economic website was ranked in the top ten “most interesting” by The Wall Street Journal. Paul is the co-author of a book entitled Seven Indicators That Move Markets (McGraw-Hill, 2002). Paul resides on the beautiful peninsula of Door County, Wisconsin where he sails his salty 1967 Pearson Commander 26, sings in a community choir and struggles to learn how to play the bass guitar (actually the bass ukulele). Paul can be contacted by email at econtrarian@gmail.com or by telephone at 1-920-559-0375.