INSIGHTS

On June 16, 2025

AAM Viewpoints — The Inflation and Full Employment Tug of War & The Dueling of the Fed’s Dual Mandate to Start an Eventful Summer

2025 was already lining up to be a contentious year as the Fed gets closer and closer to a long-awaited interest rate cutting cycle. The year began with optimism for a rate cut as soon as June, but hopes that have since faded. Liberation day and the trade war fallout have shaken up the global economy and made uncertainty the new norm. We are now in a place where at any time of day a tweet could spur volatility across financial markets. Emotions, and tweets, are running high and investors are wondering where to place their bets.

The labor market has shown some signs of cracks lately, but they may not be big enough to pull the Fed in from the sidelines. Last week we saw initial jobless claims continue to tick higher, coming in at 248,000 versus estimates of 242,000, which was also higher than the prior number. The four-week moving average is now at 240,000 — the highest since October of last year. In addition to an uptick in state unemployment filings, continuing claims having moved higher as well, emphasizing the difficulty in finding a new job after being laid off. The latest reading showed over 1.95 million filings, near levels going all the way back to late 2021. There have also been articles drawing eyeballs that reference numbers straight from company announcements, like Newsweek’s article titled, “Retail layoffs soar nearly 300% so far this year.” May’s Nonfarm payroll number did calm some fears, showing over 137,000 jobs added and the unemployment rate remaining at 4.2%, but no one can argue the overall trend isn’t concerning. In addition to cracks in the labor market, some other economic metrics are showing signs of slowing as well. Institute of Supply Management readings remain in contraction territory, light-weight vehicle sales fell almost 10% month-over-month in May. The May release of the Fed’s Beige Book quoted, “reports across the 12 Federal Reserve Districts indicate that economic activity has declined slightly since the previous report.”

There are plenty of signs that slowing is afoot, including the steepening yield curve, and if that is the case the Fed would normally begin cutting rates. The problem though, is that there is a growing consensus we will see another uptick in inflation heading into the third quarter (Q3). Last week we did get the latest readings from CPI (Consumer Price Index) and PPI (Producer Price Index) and it looks like there was slight progress. Headline CPI came in at 2.4% year-over-year while Core CPI beat estimates to the downside at 2.8%, slightly better than expected. Both month-over-month numbers were below expectations, but we are still a ways away from the Fed’s 2% target and many on the street believe a rebound in inflation may be afoot.

The latest release from Blue Chip Financial Forecasts — an outlet that compiles numbers from the largest banks and financial services providers — shows an uptick in inflation during Q3 of this year, before trending lower again, closer to the Fed’s target but not reaching 2% until late 2026. CEOs have shared these concerns. “The biggest risk we have worldwide today is the world believes we are past the high point of inflation,” said Blackrock CEO Larry Fink at the World Economic Forum. "I don't think we can predict the outcome, and I think the chance of inflation going up and stagflation is a little higher than other people think," CEO Jamie Dimon recently told reporters at JPMorgan Chase’s investor day. Under this scenario, we could see volatility pick up and the rate market move higher. It’s also possible that large scale immigration policy changes will lead to a tighter labor market and increases in wage inflation. We perhaps saw some of that in May’s Nonfarm payroll report which included a sizable uptick in Average Hourly Earnings of 3.90% on a year-over-year basis. Wages were a large part of the first inflation wave post-Covid and may play a large role moving forward.

One of the reasons the Fed is on hold is due to the uncertain backdrop the economy, and the world, is currently facing. The summer months are usually a slow time of year with fewer newsworthy headlines, but this time around we may get some clarity as there are several big dates and trade deadlines coming over the next month, not to mention potential passage of the “big, beautiful bill.” The following is a nice breakdown from research firm Strategas of what the eventful summer might have in store:

Source: Strategas Research    

Hopefully come September we will have a better idea of the economic outlook, but I’m sure more nuances will be introduced along the way. Instead of worrying about day-to-day moves and emotional responses to tweets, some might be better off with a set strategy and long-term approach. To quote famous mathematician John Allen Paulos, “Uncertainty is the only certainty there is.”