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.