A DIFFICULT DECISION FOR THE FED

 

The Federal Reserve Bank (the Fed) has a new chair recently approved by the US Senate of the US Congress.  The new chair, Kevin Warsh, and the rest of the Federal Open Market Committee (FOMC) at the Fed, including outgoing chair Jerome Powell, will have a difficult task in deciding the course of monetary policy for the US. 

Recently, the US Bureau of Labor Statistics (BLS) announced that the Consumer Price Index (CPI) in the US increased by 3.8 percent between April 2025 and April 2026.  I heard that this was the highest annual inflation rate in the United States in a few years. Despite that, should the Fed have cut interest rates further? Some may think that is an unusual question, given that inflation seems to be rising again.

Employment data could have the FOMC thinking about lowering rates soon.  The two series for (a) nonfarm payroll employment from the establishment survey and (b) household employment from the household survey, both compiled by the BLS, paint somewhat different and possibly contradictory pictures of the health of the US labor market. That may be particularly true when looking at things on both a seasonally adjusted and not seasonally adjusted basis. Measured on a seasonally adjusted basis, nonfarm payroll employment increased by 115,000 jobs in April 2026. That series reached an all time high last month. The gain in jobs was even greater when the data are NOT seasonally adjusted. With that unadjusted data from the BLS, I calculate that US nonfarm payroll employment rose by more than 925,000 jobs. However, I also estimate that the April 2026 estimate of total nonfarm payroll employment NOT seasonally adjusted is a bit more than 875,000 jobs below its all time high from November 2025.

The household survey shows more weakness in US employment. When NOT seasonally adjusted, employment increased by only about 17,000 jobs between March 2026 and April 2026. Further, the total from April 2026 is more than 1 million jobs below its April 2025 and November 2025 levels, when the total was more than 164 million jobs in each of those two months. We can infer that April is usually a stronger month than April 2026 for employment from the household survey results. Although the NOT seasonally adjusted estimate eeked out a paltry gain, when instead seasonally adjusted, the estimate fell fairly sharply. With seasonally adjusted data, I calculate that the estimate fell by more than 225,000 jobs in April 2026. I guess that the household survey in April of a year usually finds increases in employment much greater than 17,000 jobs when NOT seasonally adjusted. With seasonally adjusted data, April is the fourth consecutive month of job losses.

My 2024 Palgrave Macmillan book "Bad Breaks in Real GDP and Employment" (short title) finds, among other things, that decreases in aggregate demand can potentially have long term negative consequences for the trend growth paths of both US nonfarm payroll employment and US real GDP, both seasonally adjusted. This is at odds with conventional macroeconomic theory.

The Fed has a difficult task, because the Fed may have to make a decision on what to do about a negative aggregate supply shock where inflation rises but production and employment fall. On the one hand, the Fed must try to keep prices stable. However, the Fed must also try to keep employment growing. At least in the short run, policies geared to reduce inflation are usually if not always likely to reduce production and employment. Likewise, policies aimed toward increasing real output and employment usually if not always create inflation. So at least in the short term, the Fed probably can't work on lowering inflation and increasing jobs at the same time.  Should the Fed focus more on what appears to be weakness in US labor markets in deciding what to do with the federal funds rate at its next meeting?

SOURCES

U.S. Bureau of Labor Statistics, release accessed from the BLS website; https://www.bls.gov/news.release/cpi.nr0.htm, May 16, 2026

 

U.S. Bureau of Labor Statistics, Employment Level [CE16OV], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/data/CE16OV, May 16, 2026. 

U.S. Bureau of Labor Statistics, Employment Level [LNU02000000], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/data/LNU02000000, May 16, 2026.

U.S. Bureau of Labor Statistics, All Employees, Total Nonfarm [PAYEMS], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/data/PAYEMS, May 16, 2026. 

U.S. Bureau of Labor Statistics, All Employees, Total Nonfarm [PAYNSA], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/data/PAYNSA, May 16, 2026.

WOULD MONEY VELOCITY FOCUS AND JOBS DATA AVAILABILITY HAVE CHANGED THE FOMC INTEREST RATE DECISION?

 

US macroeconomic news on Wednesday, July 30 had the U.S. Bureau of Economic Analysis (2025) announcing that US real GDP grew at a seasonally adjusted, annualized rate of 3.0 per cent. Also, the Federal Open Market Committee (FOMC) associated with the Board of Governors of the Federal Reserve System (2025) (the central bank of the US) announced no change in the federal funds rate.  How many people are aware that the velocity of the US M1 money supply was also unchanged?  US M1 velocity remained at 1.621 times per year on a seasonally adjusted basis in the second quarter of 2025 according to the Federal Reserve Bank of St. Louis (2025).  (An earlier vintage of US M1 velocity data found US M1 velocity in the first quarter to be slightly lower at 1.620 times per year.) Would the decision of the FOMC have been different had there been more discussion of money velocity and had the jobs data released Friday, August 1 been available before the FOMC met?

I saw Jared Bernstein (2025), probably on MSNBC on Wednesday morning, reacting to the GDP announcement. In his view, the US imported heavily before tariffs would start to take effect, perhaps in the first quarter. Recalling that imports are subtracted in the calculation of US GDP (after being added toward consumption, investment, and/or government purchases as appropriate) because imports into the US reflect production in other countries, the decline in US imports last quarter was the largest contributing factor toward the increase in real GDP.   Because the building of unsold inventories counts toward investment in physical capital in national income accounting (which is used to calculate GDP), the drawdown of inventories built up to avoid the tariffs subtracts from GDP, and investment was the greatest factor reducing the growth in real GDP, which as noted above had a net positive 3.0 per cent gain.  My reading of the table Contributions to Percent Change in Real GDP, 2^nd Quarter 2025:  Real GDP Increased 3.0 Percent from the US Bureau of Economic Analysis (2025) website is that the numbers support Bernstein’s view.

Bernstein further pointed out that for the first two quarters, the average US real GDP growth rate was only around one per cent. That is below average.  Perhaps the FOMC considered that fact in deciding what to do with the federal funds rate target.  Lower interest rates could help to accelerate growth, although the FOMC decided to keep the target federal funds rate unchanged.

I don’t remember Bernstein mentioning the velocity of money, and I don’t remember others mentioning it recently. Did the FOMC consider it? Velocity is the link between M and P*Y in the equation of exchange (M*V=P*Y). Because (1) the Federal Reserve can use things like open market operations to buy and sell previously issued government debt to adjust the federal funds rate and the quantity of reserves in the banking system or keep those two things unchanged, and (2) the Federal Reserve can change the discount rate and the required reserves ratio, the Federal Reserve has much more direct control over the money stock (M) than it does over real GDP (Y) or the price level (P), but it is officially responsible for trying to achieve price stability and maximum employment, the latter frequently if not usually or always associated with growing real GDP.  Readers may want to note that P*Y from the equation of exchange equals nominal GDP.

Later, on Friday morning, the US Bureau of Labor Statistics (2025, PAYEMS) announced that the US economy added a relatively low number of new jobs, only 73,000, in the month of July and the job growth the previous two months was revised downward to an increase of just 14,000 jobs in June and just 19,000 jobs in May. Those estimates are seasonally adjusted and from what is called the establishment survey based on workplace surveys and estimates of the number of new workplaces added which would create jobs and former workplaces ceasing existence and thus no longer employing people. Using a different measure, the US economy actually lost roughly 1 million jobs in July 2025 in the establishment survey using numbers not seasonally adjusted.  (US Bureau of Labor Statistics, 2025, PAYNSA)

The household employment survey based on surveying households rather than workplaces reported that the US economy actually lost jobs in July 2025 compared with the month before, both on a seasonally adjusted and unadjusted basis. With the data not seasonally adjusted from the household survey, the job loss in July was about 80,000, and on a seasonally adjusted basis, the job loss was about 260,000. (US Bureau of Labor Statistics, 2025, CE16OV and LNU02000000)

I am certainly not a member of the FOMC, either voting or not voting, but if I were and if I would have known about estimated job losses from the household surveys and the disappointing results from the establishment surveys, then I would have voted for a rate cut at the July FOMC meeting.

Although I’m not Sir Paul McCartney, I’ve Got A Feeling that the FOMC spent little or no time directly discussing money velocity at its monthly meeting last month.  I’m also not a TV sleuth like Columbo, but my hunch is that the FOMC doesn’t talk much about velocity.  Am I right?

Had the FOMC carefully considered the most recent slowdown if not decrease in US M1 velocity at their July meeting, would they have voted to cut the federal funds rate target at that meeting?  Would the FOMC have decided to lower the federal funds rate if the jobs data released Friday would have been available sooner?

 

Please note that I performed some of the calculations above.  Also, please note that data revisions to come may change the above analysis. 

 

REFERENCES

Bernstein, Jared. (2025) Television Interview Wednesday, July 30, 2025, probably on MSNBC.

Board of Governors of the Federal Reserve System. (2025) Accessed August 2, 2025 at https://www.federalreserve.gov/newsevents/pressreleases/monetary20250730a.htm

Federal Reserve Bank of St. Louis. (2025) Velocity of M1 Money Stock [M1V], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/M1V, June 30, 2025 and August 1, 2025.

 

US Bureau of Economic Analysis. (2025) Retrieved July 30, 2025 and August 2, 2025 from https://www.bea.gov/news/2025/gross-domestic-product-2nd-quarter-2025-advance-estimate

US Bureau of Labor Statistics (2025, PAYEMS) All Employees, Total Nonfarm [PAYEMS], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/data/PAYEMS, August 1, 2025.

U.S. Bureau of Labor Statistics (2025, PAYNSA), All Employees, Total Nonfarm [PAYNSA], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/data/PAYNSA, August 1, 2025.

U.S. Bureau of Labor Statistics (2025), Employment Level [CE16OV], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/data/CE16OV, August 1, 2025.

U.S. Bureau of Labor Statistics (2025), Employment Level [LNU02000000], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/data/LNU02000000, August 1, 2025.

QUESTIONS ABOUT U.S. DEBT MANAGEMENT

 

My thanks go to the person who pointed out to me a recent article in the Wall Street Journal published yesterday (February 3, 2025).  The article written by Sam Goldfarb with the headline “Wall Street Frets Over U.S. Debt Plan” (pgs. B1, B6) deals with U.S. debt management issues, meaning the use of shorter-term debt instruments such as T-bills and notes and longer-term debt instruments such as U.S. bonds that upon issuance mature in more than ten years.  It also deals with the size of the U.S. national debt.

The article has me posing questions.  I list the questions below in sets.

 

1. Has the recent reliance on shorter-term debt been successful at enabling businesses to borrow for new buildings and machines at lower interest rates than they otherwise would have to pay?  Has it also enabled consumers to borrow for home mortgage loans at lower mortgage rates than they would have had to pay otherwise?  Was the reason for increasing the issuance of shorter-term debt as a percentage of newly issued U.S. debt to increase liquidity in the longer term, or was it to reduce the interest cost of the debt, or was it something else, or some combination?  I have a little more on this below.

2. If the U.S. Treasury would now switch to relying more on longer-term debt, then would that reduce the amount that firms would be able to borrow to spend on machines and buildings and that consumers would be able to borrow for home mortgage loans?  All other things equal or ceteris paribus, what impact would that have on U.S. real GDP?

3. What impact would the above have on U.S. employment?  My new book from Palgrave Macmillan, Bad Breaks in Real GDP and Employment:  Exploring the Persistence of Aggregate Demand Shocks in the United States, finds that the U.S. economy never completed its recovery from some economic recessions in terms of what both real GDP and employment would have been in the United States had they returned to all pre-recession trends.  Why do many people at least implicitly assume that if the unemployment rate in an economy returns to the ‘natural rate of unemployment,’ then the number of people employed has returned to its pre-recession trend and that real GDP has returned to its long-run equilibrium, which could be thought of as the maximum that an economy can produce sustainably year after year with given resources and technology? 

4. Is increasing U.S. real GDP presently a worthwhile goal if recoveries from some recessions have not been completed?  Is the main potential drawback a possible increase in inflation?

5. From perhaps a mainstream perspective, if the U.S. Treasury is concerned with reducing the cost of the national debt to taxpayers, then would it make sense to issue debt at maturity lengths where the interest rate that the federal government would need to pay to borrow the funds would be the lowest?  Is that what the U.S. Treasury was attempting to do by relying on shorter-term debt?  If the analysis of Irving Fisher was correct that lenders (and perhaps borrowers) factor their inflation forecasts into interest rates on loans to keep the real interest rate essentially unchanged, then was the U.S. Treasury signaling that financial markets were pricing an inflation premium into longer term debt that was too high and that the U.S. federal government could save taxpayers funds by refinancing at lower interest rates in the future?  Is my memory correct that at least some believe that the U.S. Treasury should issue debt at different maturity lengths to accommodate financial market participants with different preferences?  Also, was the goal of increasing the use of shorter term U.S. debt ‘in the mix’ to have funds from businesses and households ‘tied up’ for less time?

6. By contrast, are there lessons from modern money theory (also known as modern monetary theory)?  Am I correct that modern money theory would point out that the U.S. federal government (at least in the very short term) does not spend tax dollars but in essence creates money electronically by crediting recipients’ bank accounts?  Did former Federal Open Market Committee Chair Ben Bernanke make a very similar point if not the same point years ago when he appeared on the TV program 60 Minutes?  Although my understanding is that the excess of federal government expenditures over federal government revenues must be matched by borrowing if the Federal Reserve does not have sufficient funds in the U.S. Treasury’s transaction account held and operated by the Fed, is it the case that the U.S. Treasury (with assistance from the Fed) spends first and funds those expenditures later?  How could the U.S. government (if acting reasonably and responsibly) default on its own debt when most if not all of the debt is denominated in U.S. dollars, where the U.S. government itself exhibits considerable control over the quantity of those dollars in circulation and can increase the supply at relatively low cost?

 

We should have more information about the U.S. Treasury’s debt management plans soon.

 

 

How Responsible Have Early Retirements Been in Explaining Downward Breaks in US Employment and GDP?

 

Someone asked me how responsible reduced job search effort could be in explaining results in my new book Bad Breaks in Real GDP and Employment:  Exploring the Persistence of Aggregate Demand Shocks in the United States from Palgrave Macmillan in terms of a loss of real GDP, perhaps compared with previous trends.  That is, how important is it that people in the US may be substituting leisure for work (for example, early retirement) in explaining likely downward breaks in US real Gross Domestic Product (GDP) as found in Bad Breaks in Real GDP and Employment (short title)?  At least part of the thinking is that as production has increased over the decades, people may be able to live in at least some comfort without having jobs.

To begin to answer, let me point out what has been happening to living standards for millions of people in the US for decades.  I think that I heard someone on TV within the last few months say that we now have a country where we have $100 million dollar houses but a lot of our infrastructure is crumbling.  Consider how many people seem to be having a hard time getting by, let alone getting ahead.  We could have even more stuff to distribute with higher per capita real GDP.  To the extent that early retirement explains a loss of US real GDP, are many people retiring early due to weak aggregate demand growth in the US?  Does the explanation relying on early retirement for slower economic growth assume that if people decided to continue working, then they would be gainfully employed at wages or salaries that they would willingly accept, without taking any jobs away from anyone else?  Early retirements or other withdrawals from the labor market could create job opportunities for others with sufficient aggregate demand.

It seems possible that a wave of early retirements around a recession could lead to a downward break in the growth trajectories of nonfarm payroll employment and real GDP around the time of the recession.  However, are the early retirements due to weak derived demand for labor?  The demand for labor is contingent on the demand for the goods and services produced by the labor, with weak growth in wages and salaries due at least in part to weak growth in aggregate demand.  The early retirement explanation seems at least to me to be more of a supply focused explanation with fewer workers constraining supply capabilities.  But, would at least some come back into the labor market at least temporarily for the right offers assuming sufficient aggregate demand?  Also, many downward breaks in US real GDP occurred around times of falling inflation and perhaps short-term decreases in price levels.  This would suggest decreasing aggregate demand.  Additionally, note that until about 2-to-4 years ago, US inflation had been relatively contained for about 40 years.  This is despite at times very expansionary monetary and fiscal policies, reinforcing the possibility if not the likelihood of otherwise weak growth in aggregate demand.

I acknowledge that it may not be possible for real GDP to return to some pre-recession trends estimated in the book.  But even in that case or in those cases, given that the US economy now exceeds $20 trillion of real GDP, a sustained increase in real GDP of just a few percent amounts to a relatively large amount of goods and services that people could enjoy.

Maybe I should point out that to this point, I may have found possible evidence of a greater number of downward breaks in U.S. real GDP than the number of downward breaks in US nonfarm payroll employment.  Although there may have been downward breaks in US. nonfarm employment around the times of the dot com bubble recession (2001) and the Great Recession (2008-2009), if the finding holds true that there are more frequent downward breaks in real GDP than employment, then I am having difficulty seeing how early retirement can explain all of the downward breaks in real GDP. 

One thing that I may look into is whether the use of monthly data for nonfarm payroll employment may have led to the finding of fewer breaks than the number found for real GDP, which is measured no more frequently than on a quarterly basis.  Could it be that monthly measurements rather than quarterly measurements make it less likely for hypothesis tests to find evidence of breaks?

Another factor may also be relevant.  The US economy requires not only the ability to produce the goods and services that count as part of GDP in a quarter for those goods and services to be part of GDP in that quarter.  Also required is that someone or some group must pay for most of the items counted in US real GDP.  Imputed rent could be an exception because the housing services that homeowners receive from living in their own homes is not directly paid by the homeowners.  But again, that is an exception. 

The reason for this discussion is that if more people retire early, then if the early retirees could somehow increase their real spending on real GDP items by a large enough amount despite early retirement and if the economy would have the ability to produce those additional goods and services perhaps at least in part due to an improvement in technology, then real GDP could continue to grow sufficiently to avoid a downward break despite the early retirements.

 In conclusion, substituting leisure for work to some degree could easily result in less growth in real GDP in the US.  However, I question how responsible it is for ‘bad breaks.’