submitted by
Uric Dufrene, Ph.D., Sanders Chair in Business, Indiana University Southeast
You’ve likely heard the term “data dependent” when Federal Reserve officials, including Chairman Jerome Powell, discuss monetary policy. The phrase is often used to justify interest rate decisions based on evolving economic conditions.
Last September, for example, the Fed lowered the target Federal Funds rate by 50 basis points, citing signs of a cooling labor market and declining inflation as justification for the cut. A second reduction of 25 basis points followed shortly after the presidential election. Since then, the Fed Funds rate has held steady at 4.5%.
Today, both political and economic commentators are again weighing in — many arguing that it’s time for another cut. With data dependency still guiding the Fed’s decision-making, the evidence could support both the case for a cut and the case for standing pat. Let’s take a closer look at the data.
While many expect the Fed to hold rates steady in June, a summer surprise remains very much on the table.
Inflation: The Fed’s Primary Target
Inflation remains central to the Fed’s analysis. Back in September 2024, the Consumer Price Index (CPI) stood at 2.4%, with core CPI (excluding food and energy) at 3.3%. Those readings were part of the Fed’s rationale for easing rates at the time.
Fast forward to 2025: CPI remains at 2.4%, but core CPI has declined to 2.8%, a modest but meaningful improvement. From a data-dependent lens, this continued decline in core inflation strengthens the argument for a rate cut.
The Fed’s preferred inflation measure, the core Personal Consumption Expenditures (PCE) Price Index, tells a similar story. Last September, core PCE was at 2.7%; today, it stands at 2.5%. Again, this supports the notion that inflation is moving in the right direction.
Labor Market: Signs of Softening
Labor market data played a significant role in last year’s rate reductions, and similar dynamics are present now.
In September 2024, weekly unemployment claims hovered around 230,000. Currently, claims remain in that same range — fluctuating slightly but staying consistent with a stable labor market that shows no imminent signs of recession.
Payroll growth tells a slightly different story. Last September, payrolls rose by an impressive 230,000 jobs. But for the first five months of 2025, monthly payroll growth has averaged just 124,000. This represents a notable slowdown from the 165,000 monthly average seen in 2024 — suggesting a gradually cooling labor market.
Other employment indicators also support the case for easing. The Job Openings and Labor Turnover Survey (JOLTS) shows that job openings continue to exceed the number of unemployed workers by approximately 200,000 — similar to last year, but down significantly from the post-pandemic imbalance. Labor supply and demand are moving into better balance.
Wage growth has also moderated. Average weekly earnings, which were rising at a 4.3% year-over-year pace last year, have now slowed to 4%. This easing wage pressure further reduces concerns about a wage-price spiral.
The household employment survey provides additional evidence of labor market softening. In the lead-up to last year’s 50-basis-point cut, household employment rose by over 600,000 jobs, including a gain of 375,000 in September alone. This year, household employment has declined by 620,000 since January, including a 700,000 drop in May. The unemployment rate has ticked up slightly to 4.2% from 4.1% last fall — another signal of a gradually weakening labor market.
Uncertainty: Less of a Headwind Today
One argument for caution is heightened uncertainty, particularly surrounding trade policy and tariffs. But even this concern has moderated somewhat. In late 2024, the NFIB Small Business Uncertainty Index hit an all-time high as election-season rhetoric fueled concerns about tariff policies. While trade policy remains unsettled, today’s uncertainty levels are considerably lower than they were last fall.
A Summer Surprise?
If the Fed chooses to hold steady at its June meeting, the stage may still be set for rate reductions later this summer. Given the Fed’s stated commitment to data dependency, both inflation and labor market indicators now point toward conditions that justified cuts just months ago.
Whether the Fed chooses to act in July or later, one thing is clear: the data may soon leave policymakers with little choice but to begin easing rates once again.
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