September 30, 2026 

        Economic data continues to point to a resilient economy. Economic growth is being supported by investment in AI, digital infrastructure, and defense. The Institute for Supply Management (ISM) business surveys reinforced this resilient narrative, with both manufacturing and the much larger service sector indexes remaining well in expansionary territory. The Federal Reserve’s Beige Book, which reflects reports from business contacts, showed economic activity expanded modestly in 10 of the 12 Federal Reserve Districts. Even as surveys indicate households are becoming more pessimistic about the economy and their own financial situation, consumer spending on goods rebounded sharply in August. Higher gasoline prices and back-to-school shopping contributed to the increase in retail sales.

        The economy’s expansion is mostly a jobless one as the labor market has been uneven. The August employment was much stronger than consensus expectations with the July decline revised to show a small gain. Nearly half the gain in the latest report was concentrated in leisure and hospitality, which may have benefited from soccer’s World Cup. The August Job Openings and Labor Turnover Survey (JOLTS) data reinforced a stagnant “no-hire, no-fire” labor market, a trend echoed by employment weakness in the ISM Services Purchasing Managers’ Index (PMI) and minimal job growth noted in Beige Book. On the other hand, initial and continuing claims for unemployment benefits are at historically low levels, unemployment also remains low and the ADP Private Employment Change Reports have been trending upward. Taken together, the data suggests the labor market is in balance with tentative signs of improvement.

     Inflation remains sticky. The annual CPI rate remained elevated in August at 3.4%, the same as in July. Core (excluding food and energy) CPI rose 0.4% month-over-month, the largest gain in 4 months. Even so, its year-over-year rate ticked down to 2.4% from July’s 2.5%. With no sign or confidence of quick disinflation, the Federal Open Market Committee (FOMC) elected to raise policy rates at the September 15 & 16 meeting. The Personal Consumptions Expenditures (PCE) Deflators for August then surprised to the downside when reported at the end of September, but a change in the methodology used for the calculations produced widespread confusion. The Fed’s favorite gauge of inflation, core PCE, fell from a previously reported 3.3% year-over-year in July to 3.0% in August, but the June and July numbers were also revised down to 3.0%. The headline number fell from a previously reported 3.7% year-over-year in July to 3.4% in August, but the July number was revised to a matching 3.4%. While the PCE report adds to the confusion in the financial markets, inflation is still well above the Fed’s 2.0% target and prior revisions suggest it is not on any clear path toward that target.

      With firm consumer spending, robust capital investment and a relatively stable labor market, the Federal Open Market Committee (FOMC) saw risks as asymmetrically tilted to inflation remaining higher for longer. Since the July meeting, re-escalation in the Middle East conflict amid an already tight refined products market, AI-related cost pressures emerging and other commodity prices picking up again, the Committee unanimously elected to raise the federal funds rate by 25 basis points to a target range of 3.75% to 4.00% at the September 15-16 meeting. It was the first rate hike in 3 years. Policymakers are seeking to remove accommodation and produce a timelier return to the 2% goal. Additional rate hikes remain live as 16 of the 18 participants who submitted interest rate projections in the Fed’s “dot plot” expect at least one additional rate hike this year. The post-meeting press conference also had Fed Chairman prioritizing the Fed’s credibility as an inflation fighter, further adding to the speculation that additional rate hikes may be on the horizon.