Key facts
- The unemployment rate has fallen to 4.2 percent.
- Average hourly earnings have remained steady.
- Inflation remains above the Federal Reserve's 2% target.
- The Federal Reserve began a series of interest rate reductions in September 2024.
- Posted wage growth has slowed to 2.9% year-over-year.
The latest labor market report indicates that the unemployment rate has ticked down to 4.2 percent, while average hourly earnings have remained steady. This suggests that the labor market is not currently a significant source of inflationary pressure, providing Federal Reserve Chairman Kevin Warsh with flexibility to concentrate on combating inflation.
According to analysis from the St. Louis Fed, the Federal Reserve's dual mandate of maximum employment and stable prices appears to be in conflict. The unemployment rate has been gradually increasing over the past two years, reaching 4.3% in January 2026, though it remains below historical averages. Meanwhile, inflation, as measured by the PCE price index, has been consistently above the Fed's 2% target since March 2021, standing at 2.9% in 2025. This persistent above-target inflation is broad-based across various consumption expenditure categories.
In response to declining inflation from its peak and perceived labor market weakness, the FOMC began a series of interest rate reductions in September 2024, lowering the federal funds rate by 1.75 percentage points. At its January 2026 meeting, the FOMC maintained the target range for the federal funds rate at 3-1/2 to 3-3/4 percent, acknowledging risks to both sides of its dual mandate.
Recent data from Indeed's Wage Tracker shows that posted wage growth has cooled, measuring 2.9% year-over-year in June. While 57% of workers saw their pay grow faster than inflation in June, this growth has been driven by higher-paying occupations. The rapid wage growth seen in the early post-pandemic period has moderated significantly, with current wage growth generally remaining higher than inflation, leading to a boost in real income for many workers, though not all Americans are experiencing this benefit equally.