Imagine steering through the turbulent waters of the U.S. economy at this very moment—where stubborn inflation persists, job markets subtly shift, and a government shutdown casts a shadow of uncertainty over everything. It's a pivotal time that demands sharp insight and bold decisions. But here's where it gets controversial: Could policy choices, like tariffs, actually be undermining our progress toward stability, or is this just a hiccup on the road to prosperity? Let's dive in and unpack it all.
Thank you, David. I'm truly grateful for this chance to address the Brookings Institution once more. It's always a privilege to come back to the place where I kicked off my career as an eager economist. I was lucky enough to work as a research assistant for the distinguished economist and public servant Alice Rivlin, who also served as Vice Chair of the Fed early in her career. That role was not only formative but profoundly transformative for me, and I'm forever indebted to her and to Brookings for that invaluable experience.
Today, I'd like to share my perspective on how the U.S. economic landscape is unfolding, viewed through the lens of the dual mandate Congress entrusted to the Federal Reserve: fostering maximum employment and ensuring price stability. Following that, I'll explain how this assessment shapes my approach to monetary policy.
To set the stage, I must acknowledge that delivering an economic forecast during this government shutdown is exceptionally tricky. Key federal agencies, such as the Bureau of Labor Statistics (BLS), the Census Bureau, and the Bureau of Economic Analysis (BEA), haven't released much of the data I typically rely on to gauge the economy—like monthly employment figures from BLS or the personal consumption expenditures (PCE) price index from BEA, which tracks how much money people spend on goods and services. The longer this shutdown drags on, the more data gaps we'll face, potentially disrupting our ability to make informed decisions.
Economic Outlook
That said, we're not operating in the dark. At the Federal Reserve, my colleagues and I draw from a diverse array of information, including administrative records and insights from private-sector sources, to monitor the economy in real-time. This has become crucial lately with the absence of official reports. These alternative data points cover things like inflation indicators, labor activity, and measures of production and consumer spending. For instance, states still publish details on unemployment insurance claims, while online job platforms offer glimpses into open positions. Companies also share pricing info on everything from housing and cars to everyday products, along with trends in credit card transactions, consumer and business sentiment, and output in manufacturing and services. In my inaugural speech as a Governor back in 2022, I advocated for relying more on these rapid, up-to-the-minute private-sector data, and it's proving its worth today. Plus, the Fed's regional Reserve Banks are treasure troves of statistics and real-world stories, some of which feed into the Beige Book report that informs our Federal Open Market Committee (FOMC) meetings.
Beyond data, I believe engaging directly with business leaders, employees, nonprofits, and families across the nation is vital for a true picture of economic health. I'll lean on these interactions, supplemented by alternative data and the most recent federal figures, as I outline my views today.
Inflation
Let's start with inflation. Drawing from September data, the PCE price index—a key measure of inflation that includes most consumer spending—appears to have increased by 2.8 percent over the past year, well above our 2 percent goal. Even core inflation, which strips out volatile food and energy prices to focus on more stable trends, hit 2.8 percent. These figures are at least as high as they were a year ago, largely fueled by rising prices on goods impacted by tariffs.
Conversations with business executives reveal that the full effect of tariffs hasn't fully trickled down to consumers yet. Some companies are depleting their stocks at old, lower prices before hiking them, while others are holding off until tariff uncertainties clear up. Upcoming product launches, like new car models or clothing lines, give businesses a window to reset prices strategically. As a result, I anticipate inflation staying elevated for at least the coming year.
Still, the impact of tariffs is theoretically a one-off bump, not a lasting trend. It's reassuring that long-term inflation expectations, such as those from the New York Fed's Survey of Consumer Expectations, remain low and steady. Stripping out tariff influences, 12-month core PCE inflation through September looks about 0.5 percentage points lower, around 2.3 percent, indicating that core inflation is steadily approaching our target. In my view, once tariffs fade, inflation should continue its path toward 2 percent. But—and this is the part most people miss—the key condition is that tariff effects don't linger and that our monetary policy stays laser-focused on achieving that objective.
This deserves a brief pause for emphasis. The FOMC's unwavering dedication to our inflation mandate is essential to keep things in check, as my main forecast predicts. Let me be unequivocal: I'm fully committed to hitting that 2 percent inflation target. And if tariff impacts turn out bigger or more persistent than anticipated, or if signs emerge that higher inflation is embedding itself in people's expectations, I'll be ready to respond decisively.
Labor Market
Shifting gears to the labor market, while official data is lagging, the most recent indicators paint a picture of a robust yet gradually easing environment. Unemployment rose slightly this summer, from 4.1 percent in June to 4.3 percent in August—a level that's still relatively low for a thriving economy. To put this in context, the average unemployment rate over the 50 years before the pandemic was 6.2 percent. Since August, newer signals like unemployment claims, job listings, and people's perceptions of job availability suggest at most a minor increase from that August figure. Collectively, this modest uptick points to a softening labor market, but not drastically.
I can't overlook the noticeable deceleration in payroll growth over the summer. Typically, a sharp drop in payrolls signals growing slack and coincides with higher unemployment. Here, though, much of it ties to a related slowdown in population growth, driven by immigration policies. Since payrolls are swayed by these demographic shifts, they aren't a reliable gauge of labor market looseness. So, it's wise to cross-reference with those other indicators I mentioned.
And this is where it gets controversial: We're seeing harsher realities for vulnerable groups, particularly low- and middle-income (LMI) households. Youth and Black unemployment rates, which are more sensitive to economic cycles than overall rates, have climbed steadily since spring, reaching their latest August levels. This mirrors broader financial strains in many families' budgets, like rising delinquencies—especially last year—and stagnant spending among LMI households, contrasted with strong growth for higher earners. This phenomenon, often dubbed a 'two-speed' economy, highlights a divide where the affluent prosper while LMI and at-risk groups lag behind.
Monetary policy influences the whole economy and isn't tailored to specific groups. In the end, I believe fulfilling our dual mandate will yield the best results for everyone. That said, tracking this two-speed dynamic is crucial. Recognizing these challenges reinforces why precision in policy matters—LMI households would suffer most from a sudden labor downturn or persistent high inflation.
Economic Activity
Turning to broader economic activity, recent trends align with steady overall expansion. Growth has been buoyed by resilient household spending, which exceeded earlier expectations. What's even more noteworthy is the vigor in business investment, propelled by spending on advanced tech equipment and software, largely linked to artificial intelligence (AI). As I've discussed in prior talks, this hints at promising productivity gains ahead. I regard AI as a transformative technology, comparable to breakthroughs like the steam engine or the personal computer, with the power to revolutionize industries and elevate efficiency. For example, AI could automate routine tasks in manufacturing, freeing workers for creative roles, or enhance data analysis in healthcare to speed up innovations. I foresee this driving output growth in the years to come.
In the short term, however, the government shutdown is likely to dampen activity this quarter. By halting pay for federal employees and suspending government contracts for goods and services, it directly cuts public-sector output. There could also be ripple effects on the private side: Delays in government payments, approvals, or functions might slow private investments and spending, and small contractors with thin margins might face non-payment, potentially leading to closures. Yet, these impacts should be temporary, resolving once the shutdown concludes, probably in the next quarter.
To sum up, following a brief dip from the shutdown, I project moderate economic growth in the medium term, fueled by an AI-fueled productivity surge. The labor market feels solid, but I'm vigilant about downside risks. Inflation will linger a bit due to tariffs, with potential upside pressures.
Monetary Policy
With my outlook laid out, let's examine my stance on monetary policy. At last week's FOMC gathering, I backed the decision to cut the target range for the federal funds rate by a quarter-point, down to 3.75 to 4 percent. This felt right to me, as I see employment risks outweighing inflation ones. This latest cut represents another measured step toward normalizing policy. The current rate still exerts some restraint, which is fitting since inflation sits above our 2 percent aim.
I also endorsed ending the balance sheet runoff on December 1. The original plan was to halt when reserves surpassed ample levels. In the weeks before our meeting, clues like rising repo rates signaled we'd hit that threshold, validating the stoppage as the balance sheet shrank.
Looking forward, our path isn't scripted. We're in a delicate spot with heightened risks on both mandate fronts. Keeping rates too high could trigger a sharp labor market decline, while cutting too aggressively might let inflation expectations run wild. As ever, I'll adjust my policy views meeting by meeting, guided by fresh data, evolving forecasts, and risk balances. Every session, including December's, is an active deliberation.
Thank you once again for welcoming me back to Brookings. I'm excited for our discussion.
What do you think—should tariffs be viewed as a short-term nuisance or a deeper threat to economic stability? And how might AI's rise reshape jobs for everyday workers, for better or worse? Share your thoughts in the comments below; I'd love to hear your agreements or disagreements!
- These opinions are solely mine and may not reflect those of my FOMC colleagues. Return to text
- Lisa D. Cook (2022), 'Economic Outlook,' speech at the Peterson Institute for International Economics, Washington, D.C., October 6. Return to text
- See Lisa D. Cook (2024), 'What Will Artificial Intelligence Mean for America's Workers?' speech at Ohio State University, Columbus, Ohio, September 26. Return to text
