Fed Faces Growing Split as Weakening Jobs Market, Inflation

Fed Faces Growing Split as Weakening Jobs Market, Inflation Data Test Policy Path

Key Points

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The Federal Reserve cut interest rates by a quarter percentage point on September 17, 2025, due to a weakening labor market.

Employers added 22,000 jobs in August, and the unemployment rate increased to 4.3%, indicating a fragile labor market.

Headline inflation rose 2.7% year over year in August, and core inflation increased 2.9%, according to the PCE price index.

The U.S. labor markets weakening backdrop drove the Fed to cut interest rates by a quarter percentage point on Sept. 17, the first policy easing of 2025. Thats after employers added just 22,000 jobs in August, while the unemployment rate edged up to 4.3%.

The increased downside risks to employment have shifted the balance of risks to achieving our goals, Fed Chair Jerome Powell said last Tuesday in a speech to the Greater Providence Chamber of Commerce.

A week of speeches from Fed officials shows little consensus, however, about what comes next. The central banks September projections called for two more quarter-point rate cuts this year, in October and December. Yet the mix of fragile jobs growth, stubbornly elevated inflation, resilient consumer spending, and still-strong economic activity has left policymakers divided on how fast to move.

Governor Michelle Bowman warned Thursday that the Fed risks falling behind the curve on jobs. The labor market remains fragile, she said at a Psaros Center for Financial Markets and Policy event at Georgetown University, adding that rates might need to come down more quickly in the months ahead.

Newly sworn-in Governor Stephen Miran went further, dissenting at the Sept. 16-17 Federal Open Market Committee meeting in favor of a half-point cut. OnFox Business, he subsequently argued for a series of aggressive half-point moves, saying the longer borrowing costs remain elevated, the greater the risk to the economy that you really do start to get material increases in unemployment.

Other Fed officials urge a more cautious approach, citing persistent inflation.

Atlanta Fed President Raphael Bostic recently reminded audiences that inflation hasnt been as low as the Feds 2% goal for 4 years. That remains something we definitely need to be concerned about, he said.

Indeed, headline inflation ticked up 2.7% year over year in August, and core inflation, excluding food and energy prices, rose 2.9%, based on the latest reading of the personal consumption expenditures price index, released Friday. The PCE is the Feds favored inflation measure.

Kansas City Fed President Jeff Schmid said earlier in the week that while labor-market conditions justify the latest interest rate cut, inflation remains too high and policy is only slightly restrictive.

My view is that inflation remains too high while the labor market, though cooling, still remains largely in balance, Schmid said in Dallas on Thursday. I view the current stance of policy as only slightly restrictive, which I think is the right place to be.

Richmond Fed President Tom Barkin echoed that confidence, noting that after years of restrained hiring, businesses are less likely to resort to sweeping layoffs. That means the downside in the labor market should be limited, he said at the Peterson Institute for International Economics on Thursday.

Chicago Fed President Austan Goolsbee cautioned against overweighting weak payroll prints. Speaking at a breakfast event in Grand Rapids Michigan, he said he was somewhat uneasy with front-loading too many rate cuts based just on the payroll jobs numbers slowing down.

The Feds next policy meeting is Oct. 28-29. By then, officials will have another inflation report and the September jobs data in hand, two signals that could sow more confusion, even while helping to determine whether policymakers lower rates again.