caught between jobs and inflation

September saw the release of critical reports on the US economy, centered on two questions that the Federal Reserve has been deeply wrestling with.

Over the summer, inflation appeared to be reaccelerating as tariffs filtered through to consumer prices, even as the long-resilient labor market showed signs of significant weakening. That combination poses a problem for the Fed, which must balance both over the next three more policy meetings before year-end.

The first update came with the August Consumer Price Index (CPI) report, showing inflation running at an annual rate of 2.9%—the highest level since the start of the year, and more evidence that tariffs are exerting upward pressure on prices. Core CPI, which does not include the more volatile items like food and energy prices, likewise rose month-over-month to 3.1%. Yet the increases matched forecasts, leaving room for the view that inflation remains more a one-time pass-through from tariffs.

Markets seemed to agree, with the 10-year treasury yield briefly slipping below 4% for the first time since last September. Equity markets rallied on the sense that inflation, though elevated, was not out of control.

At the same time, however, the CPI release was paired with a number of indicators pointing to a cooling labor market, including a report showing initial weekly jobless claims had risen to its highest level since 2021. Although jobless claims numbers historically can be very noisy, the fact that they also came on the heels of last month’s nonfarm payrolls report. added to their impact. The August payrolls report extended a streak of large downward revisions, including June’s reading to -13,000, the first negative monthly print since the pandemic in January 2020. And in a separate release, a yearly benchmarking process saw the 12 months ending in March see a total downward revision of 991,000 jobs, the largest downward change on record.

How the balance between inflation and jobs plays out in the coming months remains uncertain, but the shift in focus is already notable. For over three years, market attention has been squarely on taming inflation. Only very recently, the deterioration in the labor picture has been enough to overshadow even high CPI prints. Taken together, the latest data cemented expectations for at least a 25-basis-point cut at the September 17th Fed meeting, with potential for additional moves at the two meetings that follow. 

Still, not all rate cuts are created equal, and the underlying reasons for rate decisions matter. Deeper cuts in the coming months would more likely signal a capitulation to economic weakness than a victory over years of inflation fighting. 

Whatever the final magnitude, the arc over the course of summer has been unmistakable, from no cuts in sight at the start to the Fed now openly signalling back-to-back reductions.