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.
