The economic expansion has advanced from the initial recovery, and the focus is now on metrics the Federal Reserve is looking at to gauge the health of the economy. Since the Fed’s dual mandate is to keep prices stable and maximize employment, we will focus on labor and inflation metrics, keeping in mind the broader economic impact as well. We created a Fed Monitor to track some of the data points that will impact the Fed’s decisions to tighten financial conditions. Additionally, we try to quantify the data and information outside of the dashboard to determine if the Fed is being more dovish than the data, and likely to be more aggressive in the future, or if they are being hawkish relative to the data, and likely to be more conservative in the future.

In a unanimous decision, the Federal Reserve (Fed) ended its nine-month pause with a 0.25% interest rate hike at its September FOMC Meeting. It was the first hike since July 2023, lifting the fed funds rate to a target range of 3.75% to 4.00%. The Fed’s updated Summary of Economic Projections (SEP) showed a median outlook for an additional rate hike by year-end, a slightly higher inflation forecast, and an uptick in 2026 economic growth. In the post-FOMC press conference, Fed Chair Kevin Warsh emphasized that inflation has been too high for too long and stressed the need for the Fed to focus on the price stability side of its dual mandate.

Persistent inflation was the driving factor behind the rate hike. Headline CPI inflation is up 3.4% year-over-year (Y/Y) through August, while core CPI’s annual increase was a more subdued 2.4%. The Fed’s preferred inflation gauge, core PCE, is up 3.3% Y/Y through July, and has risen at an annualized pace above 3% over the trailing 3, 6, and 12-month periods, ahead of the Fed’s 2.0% target. Energy prices have pushed headline inflation figures higher, but core service inflation remains stubbornly elevated. On the labor front, job growth accelerated in August to 162,000, the second highest this year. The unemployment rate held steady at 4.1%, down from its peak of 4.4% this year in February. Earnings growth eased further to 3.1% Y/Y in August, suggesting that inflationary pressures are not being driven by an overheating labor market.

Both the Fed’s projections and fed funds futures pricing indicate that an additional rate hike by year-end is likely, though not certain. We are maintaining the Fed-O-Meter dial in its current position.