Key facts
- The FOMC raised the federal funds rate by 25 basis points on September 16.
- Inflation remains elevated, with headline PCE at 3.7% and core PCE at 3.3% in July.
- The unemployment rate was 4.1% in August, with initial claims testing historic lows.
- Consumer spending remains strong, supported by asset price growth and creative ways to maintain consumption.
- Business investment is booming, particularly in artificial intelligence and the defense sector.
- Markets priced in more rate hikes than the Committee projected, due to communication delays.
The Federal Open Market Committee (FOMC) raised the federal funds rate by 25 basis points on September 16, marking its first rate hike since mid-2023. Federal Reserve Bank of Richmond President Tom Barkin explained that the decision was driven by elevated inflation, which has been above the Fed's 2% target for over five years. In July, headline PCE inflation stood at 3.7%, with core PCE at 3.3%.
Despite the inflation concerns, the labor market remains strong. The unemployment rate was 4.1% in August, and initial jobless claims are testing historic lows, with muted layoffs and job gains surpassing 160,000 in August. Barkin noted that the risks to inflation outweigh the risks to maximum employment, justifying the rate increase.
The economy and labor market are on solid footing, with businesses reporting firming conditions. Consumer spending, which accounts for about 70% of GDP, continues to be robust, even with higher gas prices. This spending is supported by asset price growth benefiting wealthier individuals and by those with fewer resources finding ways to maintain consumption through various trade-offs and by living closer to the edge. Investment is also booming, particularly in artificial intelligence and the defense sector.
Economist Claudia Sahm criticized the Fed's communication strategy, noting that the delay in releasing the FOMC's reasoning for the decision led markets to price in more rate hikes than the Committee itself projected. She advocates for including the rationale for policy decisions directly in the FOMC statement on decision day.