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At the same time, new claims for unemployment benefits are spiking. Initial claims for unemployment insurance – a leading indicator of labor market stress – jumped by 27,000 to 263,000 for the week ending September 6, according to the US Department of Labor. That’s the sharpest increase in months and well above economists’ forecasts. It suggests layoffs are becoming more common.
We also got news that past payroll growth was overstated. In a process the Bureau of Labor Statistics undertakes annually to double-check its data, the bureau recently revised its jobs data downward from April 2024 through March 2025 by 911,000.
In other words, the economy created roughly 75,000 fewer jobs per month than previously reported. This implies the labor market was weaker than it appeared all along.
Finally, workers are losing confidence. The Federal Reserve Bank of New York reported in August that the confidence of people who lost their jobs in finding another fell to its lowest level – 44.9% – since it started surveying consumers in June 2013. That’s another sign workers are feeling less secure about their prospects.
Taken together, these data points paint a clear picture: The labor market is not collapsing, but it is softening. That helps explain why the Fed is beginning to cut rates now – hoping to stimulate spending – before the job market breaks more sharply.
Prices of meat and other groceries have been on the rise recently. Photo: Scott Olson/ Getty Images via The Conversation
Even as the labor market softens, tariffs are pushing certain prices higher than they otherwise would be, complicating the Federal Reserve’s effort to bring inflation down.
Government data shows that businesses have begun passing the costs of President Donald Trump’s new import tariffs to consumers. In August, clothing prices rose 0.5% and grocery prices rose 0.6%, with especially strong gains for tariff-sensitive items such as coffee .
Lower-income households are getting hit hardest because they spend more of their budget on imported goods, which tend to be the lower-cost items most affected by tariffs. A report from the Yale Budget Lab found that core goods prices are about 1.9% above pre-2025 trends as tariffs raise costs for basic items such as appliances and electronics.
Phillip Swagel, director of the Congressional Budget Office, said recently that Trump’s tariffs have pushed inflation higher than CBO analysts had expected , even as overall economic activity has weakened since January.
Typically, a slowdown in the labor market is met with slower inflation. But while the CBO now projects that the tariffs will reduce the federal budget deficit by about US$4 trillion over the next decade – roughly $3.3 trillion in new revenue and $700 billion in lower debt service costs – but it will come at the cost of near-term upward pressure on prices .
This creates a difficult balancing act for the Fed: Cut rates too quickly, and tariff-driven price pressures could reignite inflation; move too slowly, and the softening labor market could tip into recession.
Traders react to the Fed news. Photo/: AP via The Conversation / Richard Drew
As it resumes cutting rates, the Federal Reserve is trying to thread a narrow needle – easing policy enough to keep the labor market from cracking while not reigniting inflation, which is proving stickier in part because of tariffs.
Markets are betting the Fed will keep cutting. The futures market is betting the Fed will cut rates by another half point by the end of the year . And the one-year Treasury yield has dropped about 150 basis points (1.5%) since June, signaling that investors expect a series of rate cuts through 2025 and into 2026.
At its latest meeting, the Fed signaled two more rate cuts in 2025 and at least one rate cut in 2026.
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Such cuts would ultimately bring the federal funds rate closer to 3% and hopefully reduce 30-year mortgage rates to around 5% – from an average of 6.35% as of Sept. 11 . If the labor market continues to weaken – with jobless claims climbing, payrolls revised down and more workers stuck in long-term unemployment – that expectation will likely harden into consensus.
But the path is far from certain. Cutting rates too quickly could cause inflation to spike, while going too slow could lead to further deterioration in the labor market. Either outcome would jeopardize the Fed’s credibility – whether by appearing unable to control prices or by allowing unemployment to rise unnecessarily. That would undermine its ability to influence markets and enforce its dual mandate of maximum employment and stable prices.
Another tricky issue is Trump’s public campaign to push the Fed to cut rates – appearing to do his bidding could also undercut Fed credibility. For what it’s worth, the September 17 rate cut appears driven less by politics than by economic data. The Fed itself was projecting a year ago that rates would be much lower today than they actually are, suggesting it’s been following the data.
The economy appears to be slowing but remains resilient, which is why the Fed is likely to move gradually. The risk is that the window for a soft landing is closing. The coming months will determine whether the Fed can ease early enough to avoid recession, or whether it has already waited too long.
Ryan Herzog is associate professor of economics, Gonzaga University
This article is republished from The Conversation under a Creative Commons license. Read the original article .
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