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Economic Commentary

Economic Commentary – September 2, 2025

September 2, 2025 by Jeanette Garretty, Chief Economist

Lost in the sigh of relief that the inflation numbers (Personal Consumption Expenditures Index, or “PCE”) last Friday weren’t all that bad was the fact that inflation has conclusively ceased its movement to the Federal Reserve target of 2%. Given that the Federal Reserve has not changed its target inflation rate, it would normally be assumed that the Fed would not alter a monetary policy judged to be moderately restrictive. These, of course, are not normal times. Yet it is worth remembering that should employment growth, as measured by the Bureau of Labor Statistics (“BLS’), have rebounded in August, there will be a real conundrum for the Federal Reserve and its Board of Governors (all of them) to resolve. A Fed rate cut in September, despite the ongoing discrepancy between inflation of 2.7%-2.8% and the target of 2%, can and will be explained as a move to a slightly less restrictive but still restrictive monetary policy. However, if this week’s employment numbers further support the 2.5%+ economic growth estimate for the current quarter, there will be real questions regarding the extent to which current monetary policy is actually restrictive. Various observers, including members of the Federal Reserve firmament, have at times speculated that the current interest rate is, in fact, the much-discussed “neutral rate of interest,” or R*. If that is the case, then an interest rate cut in September would be a truly significant monetary policy shift into an expansionist regime, at a time when inflation is either not going in the right direction or actually going in the wrong direction. The last time this Federal Reserve made a similar policy (mis)step? When rates were kept too low for too long in 2021-2022.

Data to Watch

  1. Institute for Supply Management (ISM) Index for Manufacturing and Manufacturing New Orders and Prices, for August, released Tuesday, September 2.
  2. ADP Payroll Data for August, released Thursday, September 4
  3. US Balance of Trade, Imports and Exports for July, released Thursday, September 4
  4. US NonFarm Payrolls and Unemployment for August, released Friday, September 5

Suggested Reading

  1. Six Months Into Tariffs, Businesses Have No Idea How to Price Anything
  2. A historic change in how Americans buy groceries is underway as SNAP benefit cuts begin
  3. The Boom in New Steel Mills Is Outpacing Demand
  4. There Is Now Clearer Evidence AI Is Wrecking Young Americans’ Job Prospects
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