Update 893 – Macro Muddle Faces Fed;
Democrats’ Shutdown Strategy Emerges
The nation’s macroeconomic picture got murkier this week, with CPI showing August prices rising by the most since January, even as jobless claims jumped by the most in four years this week and unemployment edged up last month — “a curious kind of balance,” Fed Chair Powell said, that may slow the pace of rate cuts and risk stagflation. The Fed is expected to cut rates by 25 points next week.
Meanwhile, the Hill Democrats’ strategy regarding the FY26 budget negotiations began to clarify this week, with House and Senate Party leadership holding out healthcare policy demands, specifics TBD, as their price for supporting a shutdown stopgap to keep the government funded past September 30. And the case testing the legality of much of Trump’s tariff policy moved to the Supreme Court. Details below.
Good weekends, all.
Best,
Dana
Headline
Data Shows Inflation Rising as Labor Market Slows
Inflation Rises to 2.9% in August
Inflation, as measured by the Consumer Price Index (CPI), ticked up in August to its highest level since January as the Trump administration’s tariffs continue to push prices up in key sectors across the economy.
Prices rose by 0.4 percent on a monthly basis and by 2.9 percent annualized in August, per the August CPI report released by the Bureau of Labor Statistics yesterday morning. This figure is up from an annualized increase of 2.7 percent in both June and July and a 2.4 percent increase in May. Core CPI – which excludes food and energy prices – rose by 0.3 percent on a monthly basis and by 3.1 percent on an annualized basis in August, on par with the 3.1 percent annualized increase in CPI prices in July.
Prices in several tariff-sensitive sectors rose over the month. Among them, the prices of:
- apparel rose 0.5 percent,
- new vehicles rose 0.3 percent, and
- household furnishings and operations rose 0.2 percent.
Food prices rose by 0.5 percent on a monthly basis in August after remaining flat in July. Grocery prices rose 0.6 percent on a monthly basis in August after falling 0.1 percent on a monthly basis in July. Meanwhile, energy prices rose by 0.7 percent on a monthly basis in August after falling by 1.1 percent on a monthly basis in July.
U.S. Economy Added 911,000 Fewer Jobs Than Previously Estimated
The United States economy added 911,000 fewer jobs than previously reported from March 2024 to March 2025. This is according to a preliminary benchmark revision to total nonfarm employment released by the Bureau of Labor Statistics on Tuesday. It was the largest such revision in history, going back to the year 2000.
The new data reveals that the labor market softened by significantly more than previously estimated last year – monthly job gains in 2024 averaged 106,000 per month, down from the previously estimated 168,000 per month. Monthly job gains in 2025 averaged 44,000 per month, down from the previously estimated 75,000 per month.
The final benchmark revision for the period will be issued in February 2026.
Fed Likely to Cut Interest Rates Next Week
The new data comes ahead of the Federal Open Market Committee’s (FOMC) meeting next week, during which it will decide the immediate future level of interest rates. Committee officials have opted to hold interest rates steady at the 4.25 to 4.5 percent range this year.
President Trump has been seeking to secure a majority on the Fed’s Board of Governors to gain influence over these traditionally politically insulated monetary policy decisions. Republicans are rushing to confirm Stephen Miran, Chair of the White House Council of Economic Advisors, to fill an unexpired term on the board before the meeting, but a Senate vote on his confirmation is yet to be set. Trump has also attempted to remove Biden-appointed Governor Lisa Cook from her position on the board. The United States Court of Appeals for the District of Columbia Circuit is scheduled to determine this weekend whether Cook can remain at the Fed while challenging Trump’s attempt to remove her. The court’s decision will determine whether she can participate in next week’s FOMC meeting.
The data shows that inflation is rising further above the Federal Reserve’s target of two percent, while the weakening labor market is softer than previously thought, placing the Fed’s dual mandate of stable prices and maximum employment in tension. Fed Chair Jerome Powell has said committee officials will balance risks on either side of its dual mandate, taking a data-dependent approach to its monetary policy decisions. The significant moderation in job gains over the past nearly year and a half will almost certainly incline FOMC officials to cut rates by 25 basis points at their meeting on Tuesday and Wednesday.
Other Developments
FY26 Appropriations Update
The federal budget-making season is in full swing as the end of the 2025 fiscal year (FY25) approaches on September 30. Congress now has only seven in-session days to address FY26 appropriations if it wants to avoid a government shutdown beginning October 1. Although progress has been made on some spending bills, lawmakers remain far apart on full-year funding levels, making a short-term continuing resolution (CR) – which extends funding temporarily at prior year levels – the only realistic solution to avoid a harmful shutdown.
Still, many hurdles remain. Spending bills (including a CR) require 60 votes in the Senate, and with only 53 Republicans in the upper chamber, the GOP will need some measure of Democratic support. However, Democrats are demanding meaningful negotiations and concessions in exchange for their votes, and Republicans are seemingly unwilling to play ball.
There are also disagreements over the length of a potential CR, with the Trump administration and some far-right Republicans (e.g., House Freedom Caucus members) pushing for a longer-term CR that extends into next year and appropriators aiming for a shorter-term stopgap that allows them to continue building momentum on negotiating full-year spending bills. Finally, the Trump administration’s continual attempts to subvert Congress’s power of the purse by unaliterally cutting congressionally-appropriated funding remain a constant threat to good-faith, bipartisan negotiations and could tank any agreement Congress is able to reach.
Democratic FY26 Strategy Taking Shape
Democrats have been in search of a unified strategy on government funding after their failure to receive concessions for their votes on the March full-year CR that is currently funding the government. As some may remember, in a move that sent shockwaves through the Democratic base in March, Minority Leader Chuck Schumer (D-NY) and nine Senate Democrats opted to allow the Republican-proposed CR to pass with nothing to show for their support. Congressional Democrats – especially House members who stood united against the CR – as well as many in the Democratic base, were furious over this decision amid the Trump administration’s many extreme and unilateral actions, going as far as to demand a primary challenger for Schumer, the top-ranking Democrat in the Senate.
Schumer and Democratic leadership now face a very similar dilemma, with an understanding of both the harmful impact of a government shutdown and the fact that they need a strong showing to get tangible wins and please their base. As Ezra Klein noted in a New York Times opinion piece last weekend, we are in a different situation today compared to March. Republicans have enacted their massive OBBB bill with steep healthcare cuts and have ownership over federal agencies since they gutted them. Schumer’s main reasons for supporting a CR earlier this year – that Democrats might take the blame for Trump-induced economic turmoil in the case of a shutdown and that it would give Trump and DOGE an opportunity to shutter the agencies they were in the process of decimating – no longer apply. Add to that the base’s discontent with the March strategy and Trump’s continued authoritarian policy and conduct, and it is clear that a different, stronger approach is needed this time around.
Following a meeting yesterday morning, House Minority Leader Hakeem Jeffries (D-NY) and Senate Majority Leader Schumer settled on a distinct focus for negotiations: health care – which was gutted by the Trump administration’s OBBB signed into law this July. In Schumer’s words, “On this issue, we’re totally united. The Republicans have to come to meet with us in a true bipartisan negotiation to satisfy the American people’s needs on health care, or they won’t get our votes, plain and simple.”
The focus for Democrats within the realm of healthcare is two-pronged:
- Extending expiring improvements to Premium Tax Credits (PTCs) that were enacted in the American Rescue Plan Act (ARPA) and subsequently extended through 2025 in the Inflation Reduction Act (IRA). (*allowing the enhancements to expire is projected to increase premiums by over 75 percent and cause over 4 million people to become uninsured).
- Scaling back OBBB healthcare cuts (though they have not made more specific demands on this front).
Senate Majority Leader John Thune (R-SD) has taken the first item off the table for a short-term CR, and the second is unlikely, given Republicans enacted the harmful cuts just two months ago. But, with this hard line, Democrats are sending a clear message: work with us on health care or take responsibility for the resulting government shutdown.
So… Shutdown Ahead?
While leadership works to resolve top-level concerns like health care, appropriators continue to construct a potential CR package that could receive bipartisan support in both chambers. They have apparently settled on a “CRomnibus” spending package, which would include three full-year appropriations bills – Milcon-VA, Agriculture, and Legislative Branch – paired with a CR to address funding for the remaining nine bills. Yesterday, House and Senate appropriators struck an agreement on funding levels for the three spending bills, signaling some progress. Still, without an agreement on the remaining bills and the Democrats’ expected overarching demands, it will be near impossible to move any sort of resolution with bipartisan support.
The White House has been a limited player thus far in FY26 negotiations, signaling its preference for a longer-term CR that extends into next year and releasing a request for anomalies this week – which are adjustments to current spending and policies often included in CRs to allow exceptions to prior-year funding levels. But the administration has largely left funding negotiations specifics to Congress, which will surely change in the weeks ahead. Trump has a history of changing the terms of a deal at the last minute, and even if congressional leaders are able to strike a deal that can secure Democratic support, it will need to get his sign-off.
Ultimately, any government funding solution will require Democratic support to pass. Given the Republicans’ refusal to engage in legitimate bipartisan negotiations, the chance of a harmful government shutdown grows with every passing day. Thune has argued that Democrats are “clamoring” for a shutdown in his own attempt to shift the blame. But by not even entertaining what is considered to be the minimum ask for Democrats – extending enhanced PTCs – it’s clear that Thune is not taking Democrats’ demands seriously. While it’s not currently clear exactly where Democrats will set the line on forcing the shutdown, something will have to change to avoid a shutdown. Families and communities will be the ones forced to pay the price if Congress does not act before the end of the month, facing furloughs, delayed services, and increased economic uncertainty that will only serve to exacerbate existing hardships.
Supreme Court to Take Up Tariffs, Exemptions
Supreme Court Green-Lights Expedited Case
On Tuesday, the Supreme Court agreed to take up a watershed case on much of Trump’s trade agenda. The Court will be weighing the legality of the administration’s use of the International Emergency Economic Powers Act (IEEPA) to levy tariffs on many of the United States’ trading partners. IEEPA was first used by President Trump to levy tariffs on Canada, Mexico, and China with Trump declaring an emergency citing fentanyl entering the United States. Liberation Day tariffs, on the other hand, were implemented based on the President’s declaration of trade deficits as a threat to national and economic security.
President Trump is hoping the Court will overturn lower court rulings against his administration, which argues that the executive branch can act broadly in times of declared emergency and that IEEPA’s language allowing the executive to “regulate… importation” with tariffs can be interpreted as permissible. But IEEPA language does not include the word “tariff.” The lower courts ruled the President acted outside of his authority and pointed to the constitutionally delegated power of the purse of Congress. They also acknowledge that Congress has yielded some power to the executive to levy tariffs and duties, but does so intentionally as explained in the Federal Court of Appeals ruling: “whenever Congress intends to delegate to the President the authority to impose tariffs, it does so explicitly, either by using unequivocal terms like tariff and duty, or via an overall structure which makes clear that Congress is referring to tariffs.”
In a curious legal argument that frames tariff revenue as “too big to fail,” the administration points to the hundreds of billions – even trillions – of dollars that would be lost if the tariffs are overruled. These projections are largely inflated, however, with more realistic estimates recording tariff revenue to be around $180 billion, with IEEPA tariffs equalling about half of that amount.
If the Supreme Court upholds the lower court rulings to invalidate Trump’s IEEPA tariffs, the administration could be forced to refund American companies who have had to pay the duties – it is important to note here that tariffs are duties paid by the American importer. The Court could hear arguments as early as the first week of November. In the meantime, Trump’s tariffs remain in place.
New Exemptions to Sweeten Trade Deals?
Even with this backdrop of intense legal uncertainty, Trump is still trying to get trading partners to the negotiating table. Perhaps to sweeten a trade deal with the United States, the President signed an executive order, which took effect on Monday, that lists dozens of exempted products with trading partners who have struck deals with the administration.
The “Potential Tariff Adjustments for Aligned Partners” outlines the products to which the President can apply, the much lower, “Most Favored Nation” tariff rate. The products fall in the following categories:
- “certain aircraft and aircraft parts;
- certain generic pharmaceuticals and their ingredients;
- unavailable natural resources and closely related derivative products; and
- certain agricultural products not grown or produced in sufficient quantity in the United States to meet domestic demand.”
The countries which have already struck trade deals with the administration include the European Union, South Korea, and Japan, with rumors of deals with Taiwan on the horizon and signals of renewed talks with India.
Hearings
SBC Looks at Expanding Deposit Insurance Coverage
The Senate Banking Committee convened for a hearing on Wednesday, where senators discussed a set of proposals to expand federal deposit insurance coverage.
The Federal Deposit Insurance Corporation (FDIC) and the National Credit Union Administration (NCUA) insure deposits up to $250,000 per depositor at each insured financial institution. While over 99 percent of all deposit accounts are fully insured by the FDIC, some businesses often maintain balances exceeding $250,000 in accounts used to store money for payroll, operating expenses, and everyday payments.
The hearing comes as two committee members – Senators Bill Hagerty (R-TN) and Angela Alsobrooks (D-MD) – recently filed an amendment to the National Defense Authorization Act (NDAA) reauthorization proposing to increase deposit insurance coverage on business transaction accounts up to $20 million for banks with less than $250 billion in assets. Hagerty said the senators plan to file updated stand-alone legislation to address the issue. Committee Chair Tim Scott (R-SC) and Ranking Member Elizabeth Warren (D-MA) have also reportedly been discussing options to expand deposit insurance over the past several months.
Some form of deposit insurance coverage expansion appears to have bipartisan support from committee leadership, with Chair Scott saying, “I think that this committee should act frankly, on increasing the limits,” and Ranking Member Warren saying, “I’ve long pushed for leveling the playing field by increasing deposit insurance limits for business transaction accounts.” It appears, however, that committee members have yet to reach a consensus on details of an updated framework for deposit insurance coverage.
Look Ahead
Tuesday, September 16
- September FOMC meeting (Day 1)
Wednesday, September 17
- September FOMC meeting (Day 2)
- House Committee on Financial Services Task Force on Monetary Policy, Treasury Market Resilience, and Economic Prosperity hearing: Less Mandates. More Independence