Jobs, Wages, and the Fed's Inflation Fight

Not too hot; not too cool. From the Federal Reserve's perspective, the U.S. labor market might be striking a helpful balance. It's creating enough jobs to help keep the unemployment rate low, but not enough to generate significant wage increases that would fuel inflation.

But things can change quickly. Only nine months prior to the September hike, in December 2025, the Fed cut rates with an eye on what then-Chair Jerome Powell described as rising downside risks to employment amid weakening job growth. That was the shortest amount of time to elapse between a Fed rate cut and rate hike in more than a quarter century.

After the Fed raised interest rates in September, Chair Kevin Warsh said upside and downside risks to the labor market were roughly balanced, unemployment claims were consistent with full employment, and the job market signaled strength in the U.S. economy. That gives the Fed room to focus on containing inflation in the medium term while not damaging the labor market, Warsh said.

That's a welcome development for a new Fed chair facing sharply higher oil prices and inflation that remains well above the central bank's 2% target. Annual inflation, as measured by the Personal Consumption Expenditures (PCE) price index, the Fed's preferred gauge, was 3.4% in August.

Jobs data shows how the picture has changed for Warsh. The weakness seen in the second half of 2025 gave way to relatively slow, uneven jobs growth in 2026. More than twice as many jobs were created in the first nine months of 2026 as in the same period of 2025. The three-month average of monthly payroll gains rose to about 142,000 in May before falling back to about 51,000 in September.