September 2022 National Economic Outlook

Fed Continues to Tighten Aggressively as Inflation Remains High, Labor Market Remains Strong

Executive Summary

Although month-to-month inflation was weak in August, with the consumer price index up just 0.1% from July, the consensus expectation was for a small decline. And the core CPI, excluding volatile food and energy prices, jumped 0.6% in August, after a 0.3% increase in July. Thus the August CPI report was disappointing, and high inflation continues to put pressure on the Federal Open Market Committee to slow economic growth. 

  • Energy prices fell 5.0% in August, following a 4.6% decline in July, as gasoline prices continue to decline. 
  • But food prices were up 0.8% for the month, and have increased by 1% or more in five of the past six months.
  • Year-over-year CPI inflation was 8.2% in August, down from 8.5% in July and 9.0% in June. 
  • Core CPI inflation was 6.3% in August, up from 5.9% in July, but down slightly from a peak of 6.4% in February and March. Inflation has likely peaked, but remains extremely elevated. 

The U.S. labor market remains extremely healthy in the summer of 2022. The U.S. economy added a very good 315,000 jobs in August from July, according to a survey of employers, and employment continues to move further above its pre-pandemic peak. 

Over the past three months job growth has averaged a very good 378,000, well above the pre-pandemic pace, but slower than an average of almost 600,000 at the beginning of the year. The private sector added 308,000 jobs in August, with government employment up by 7,000.

The unemployment rate rose from 3.5% in July, the lowest rate in more than 50 years, to 3.7% in August, but that was due to more people looking for work over the month, a sign of health in the economy. Wage growth slowed in August, but was stronger than inflation.

With inflation still running near the fastest pace in 40 years and the labor market very tight, the FOMC raised the federal funds rate by 75 basis points on September 21.

This was the third straight meeting with a 75 basis point increase in the fed funds, and the FOMC has raised the fed funds rate by a full 3 percentage points in 2022, to a range of 3% to 3.25%, with further rate increases to come through the rest of this year and into 2023. 

In raising the federal funds rate, the FOMC reiterated that it “is strongly committed to returning inflation to its 2% objective.” In determining the path of the fed funds rate, the committee said that it will look at the state of pandemic, the labor market, inflation pressures and expectations, financial conditions, and the global economy.

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September National Economic Outlook

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