Economic Update: Inflation, Unemployment, and the Fed’s Recent Rate Adjustment

A quick overview of what has been happening in the US economy.

Recent economic data shows continued job growth, with total nonfarm payroll employment rising by 254,000 in September. While this exceeds the prior year’s monthly average of 203,000 jobs, concerns remain over the broader economic landscape, particularly the Federal Reserve’s ongoing interventionist approach to managing inflation through rate adjustments. Sectors like food services, health care, government, social assistance, and construction led the employment gains. However, the unemployment rate held steady at 4.1%, a slight increase from last year’s 3.8%.

The Federal Reserve’s decision to lower the target range for the federal funds rate by 0.5%, bringing it to 4.75% to 5%, aims to balance economic growth with inflation control. The move comes despite inflation remaining above the Fed’s 2% target, raising questions about the effectiveness of monetary policy in achieving long-term stability. Some may argue that such aggressive adjustments risk distorting market signals, potentially causing more harm than good over the long term. Although those who have purchased homes at high interest rates are eager to seek refinances as interest rates begin to lower.

The Federal Open Market Committee (FOMC) insists on its commitment to maximum employment and price stability, but the persistence of elevated inflation suggests that other factors, such as supply chain disruptions, labor market constraints, and energy prices, may be exerting more influence than interest rates alone. September’s employment growth in key sectors—particularly food services (+69,000 jobs), health care (+45,000 jobs), and construction (+25,000 jobs)—paints a positive picture of labor market resilience. However, the unemployment rate at 4.1% and 6.8 million people still unemployed suggest that underlying structural issues remain unaddressed.

Demographically, unemployment rates showed little significant change in September, with adult men’s rates slightly decreasing to 3.7%. Rates for other groups, such as women (3.6%) and teenagers (14.3%), stayed relatively stable. Long-term unemployment also increased, from 1.3 million a year ago to 1.6 million, signaling potential challenges in matching workers with available opportunities despite overall job growth.

The Fed’s continued reduction of its holdings in Treasury securities and mortgage-backed assets suggests a cautious long-term approach to reigning in its intervention, but questions remain about how effective these measures will be in stabilizing the market without further distortions. Critics of such policies argue that constant intervention creates a dependency on government actions, hindering the market’s natural ability to self-correct.

Meanwhile, the August 2024 Consumer Price Index (CPI) report shows inflation pressures cooling slightly. The CPI for All Urban Consumers (CPI-U) increased by 0.2% in August, the same rate as in July. Over the past 12 months, the CPI rose by 2.5%, the smallest annual increase since February 2021. While this signals progress toward easing inflation, the underlying issues caused by the record setting money printing during the lockdowns still remain. Particularly the housing crisis, raising concerns about how sustainable this progress will be without significant shifts in policy or market conditions.

Key Contributions to CPI in August 2024:

Shelter: The shelter index rose 0.5% in August and 5.2% over the past 12 months, continuing to be a major contributor to inflation. With housing policies often subject to regulation and government intervention, some may question whether the Fed’s rate adjustments alone can effectively control these costs without addressing the regulatory environment that constrains supply.

Food: The food index rose by a modest 0.1% in August, with the index for food away from home increasing 0.3%. Over the past year, the food index increased 2.1%, with food away from home up 4.0%. While inflationary pressures have eased, persistent increases in certain sectors raise questions about whether government policies affecting food production, trade, and labor are contributing to these trends.

Energy: Energy prices fell 0.8% in August, with gasoline prices dropping by 0.6%. Year-over-year, the energy index fell by 4.0%, led by a 10.3% decline in gasoline prices. While these price drops offer relief to consumers, some may attribute this more to global market dynamics than to the Fed’s domestic policy efforts. Electricity prices, however, increased 3.9% year-over-year, potentially reflecting ongoing challenges in energy regulation and supply management.

All items less food and energy: Core inflation, which excludes volatile food and energy prices, increased by 0.3% in August. Significant price rises in areas like airline fares (+3.9%), motor vehicle insurance (+0.6%), and education reflect broader inflationary pressures. Over the past year, this core index has risen by 3.2%, suggesting that while energy prices may be declining, broader price pressures are proving more resistant to Fed policies.

12-Month Overview:

Over the last year, inflation has slowed, with the 2.5% increase in the all-items index signaling some easing compared to previous highs. This progress is largely driven by falling energy prices, particularly in gasoline and fuel oil. However, inflation in sectors such as housing, motor vehicle insurance, and medical care remains stubborn, challenging the idea that monetary policy alone can resolve the complexities of modern inflation dynamics. But we are no where near what prices were in 2019 pre lockdowns.

As the September 2024 CPI report approaches, attention will focus on whether this recent progress is sustainable or if deeper structural reforms—perhaps less reliant on Federal Reserve intervention—are needed to promote long-term stability. For those with a free-market perspective, the ongoing reliance on the Fed’s monetary adjustments may raise concerns about unintended consequences and market distortion, even as the Fed navigates a challenging economic landscape.