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.