Weekly global economic update

Week of September 22, 2025

• The Federal Reserve chooses to loosen monetary policy
• Bank of Japan at a crossroads as exports weaken
• China indicators point to weakness

The Federal Reserve chooses to loosen monetary policy

• As expected, the US Federal Reserve cut the benchmark Federal Funds rate by 25 basis points. It is now in the range of 4% to 4.25%. The vote was almost unanimous. Only Stephen Miran voted to cut the rate by 50 basis points. Miran, newly appointed by President Trump and confirmed by the Senate, had only been sworn in recently. He remains an advisor to the White House

As justification for the decision, the policy committee stated that “growth of economic activity moderated in the first half of the year. Job gains have slowed, and the unemployment rate has edged up but remains low. Inflation has moved up and remains somewhat elevated.” Thus, the Fed appears to be more concerned with its employment mandate than its inflation mandate. This was the first change in interest rates since last December. In late 2024, the Fed had cut the rate by 100 basis points over the course of a few months but then halted due to uncertainty about the policies of the new administration.

Also, the Fed published committee members’ forecast for interest rates. A narrow majority expect at least two more interest rate cuts this year, in October and December. Thus, the Fed appears to be embarking on a renewed easing of monetary policy. Immediately following the Fed action, bond yields fell modestly while the value of the dollar fell more robustly. Equity prices increased modestly.

Finally, in anticipation of the Fed’s action, the Bank of Canada already cut its benchmark interest rate. Canada’s economy is suffering from the impact of the US trade policy, with employment falling while inflation remains muted. Interest rate cuts are seen as a tool to boost domestic demand and further weaken the currency. The latter would help to offset the impact of tariffs.

Meanwhile, there were two new data points recently that might have influenced the Fed’s decision, not so much regarding recent action as regarding expectations of future action. The Fed has a dual mandate to minimize inflation and maximize employment. The current view appears to be that the inflationary impact of tariffs will be relatively short-lived, especially as the economy is expected to weaken. Thus, the Fed can cut interest rates with impunity. However, if the Fed takes the view that the economy will not weaken significantly, it might worry that the inflationary impact of tariffs could be sustained due to a wage-price spiral. In that case, the Fed would likely want to avoid an excessive easing of monetary policy.

The data released recently indicated that, in August, retail spending was stronger than anticipated, suggesting considerable resilience on the part of consumers. On the other hand, the government also reported that industrial production grew feebly in August, suggesting a slowdown in output growth. Let’s look at the details.

In August, US retail sales rose 0.6% from the previous month and 5% from a year earlier. Retail sales are reported in nominal dollars, not adjusted for inflation. This means that any price increases are included in the data. As inflation has started to accelerate lately, this partly explains the strength of the report. Indeed, prices of durable goods are rising faster than at any time since the pandemic. Still, even when inflation is excluded, it appears that spending grew at a healthy pace.

By category, retail spending grew from the previous month by 0.5% for automotive, 0.3% for electronics and appliances, 0.1% for home improvement, 0.5% for gasoline, 0.3% for grocery stores, 1% for clothing stores, and a very strong 2% for non-store retailers. Meanwhile, sales declined 0.3% for furniture stores, 0.1% for drugstores, and 0.8% for department stores. Thus, it was a mixed bag.

Industrial production in August rose 0.1% from the previous month and 0.9% from a year earlier. This is very modest growth. The manufacturing component rose 0.2% from the previous month and 0.9% from a year earlier. This is also modest growth.

By category, there was strong growth of output for the automotive sector and for home appliances. However, there was a sharp decrease in production of home electronics. Notably, there was a sharp decline in production of electricity and only a very small increase in output of natural gas. Electricity demand is rising rapidly, driven by investment in AI, leading to big price increases. Thus, the failure to boost output is concerning. If electricity output continues to fall behind the rise in demand, there could be substantial price increases, which would have a negative impact on consumer spending.

From the perspective of the Federal Reserve, consumer engagement remains relatively strong, while output of industrial goods and services is growing only modestly. Plus, the latest labor market data indicates a sharp slowdown in job creation and a significant increase in initial claims for unemployment insurance. On balance, it appears that the economy is slowing. And, if so, it is less likely that there will be a wage-price spiral that would sustain the inflation generated by tariffs. Thus, it makes sense that the Fed cut rates. The big question is how fast and how far they will go.

Finally, long-term borrowing costs usually follow expectations of short-term borrowing costs. After all, theoretically a long-term bond yield is a prediction of future short-term rates. Indeed, the yield on the Treasury’s 10-year bond has fallen lately as investors have become more convinced that the Fed is likely to cut short-term rates. However, if investors perceive the Fed as going too far or too fast, this likely would lead to a rise in bond yields as investors would boost their expectations of inflation and their expectations regarding future Fed policy. Plus, if in 2026, Powell is replaced by someone seen as attuned to the goals of the administration, this too would lead to higher borrowing costs as it would signal less independence for the Fed.

Bank of Japan at a crossroads as exports weaken

• In Japan, consumer prices inflation receded in August, with prices rising 2.7% from a year earlier. This was the lowest rate of headline inflation since October 2024. However, this was largely due to a sharp reduction in energy prices. Indeed, electricity prices fell 7% from a year earlier, due to government subsidies. When volatile food and energy prices are excluded, so-called core-core prices rose 3.3% in August from a year earlier. This was down from the 3.4% gain in both June and July, but close to the highest level since early 2024. Thus, from the perspective of the Bank of Japan (BOJ), underlying inflation remains very high.

Meanwhile, the BOJ chose to leave its benchmark interest rate unchanged, despite expectations that it would raise rates to fight underlying inflation. BOJ Governor Ueda said that there remains uncertainty about the potential impact of US trade policy. Consequently, he said that the BOJ requires “more data” before deciding whether to raise interest rates.

The decision by the BOJ was not unanimous. Of the nine members of the policy committee, two voted to raise interest rates. One such voter said that with “risks to prices becoming more skewed to the upside, the bank should set the policy interest rate a little closer to the neutral rate.” Currently, the benchmark rate is 0.5%. On the other hand, Governor Ueda said that risks to the economy are “skewed to the downside.” That is, the US trade policy is creating a risk that economic activity will decelerate or decline.

After a prolonged period of historically low (negative) interest rates, the BOJ started to raise rates in March 2024. However, it paused starting in January 2025, largely due to the uncertainty surrounding US trade policy. Interestingly, this was about the same time that the US Federal Reserve started to pause as well.

In response to today’s decision, the Japanese yen appreciated and the yield on Japan’s 10-year government bond increased modestly. The latter is now close to a 17-year high. With the US Federal Reserve now starting a path of monetary easing, the gap between the benchmark short-term interest rates of the United States and Japan is starting to diminish. This will likely contribute to a strengthening of the yen against the dollar—all other things being equal.

Meanwhile, Japanese Prime Minister Ishida announced he will resign as leader of the Liberal Democratic Party. This sets the stage for an election in a few days to decide the new party leader. That leader will almost certainly succeed Ishida as prime minister. The race for party leader is dominated by discussion about the weak economy, the high cost of living, and the fiscal constraints on the government. With bond yields having risen, and with the government having made commitments to boost spending on defense and education, the trajectory of the fiscal deficit is concerning. Yet political leaders are under pressure to boost other areas of spending to support households.

• For the fourth consecutive month, Japan’s exports declined from a year earlier when measured in US dollars. The decline is largely due to US tariffs. In August, overall exports were down 0.1% from a year earlier. This included a 13.8% decline in exports to the United States. In addition, exports to China were down 0.5% while exports to Southeast Asia were down 2.8%. Some Japanese companies ship inputs to China or Southeast Asia for assembly before shipping final products to the United States. US tariffs on imports from China and Southeast Asia have weakened shipments to the United States from these countries. Meanwhile, Japanese exports to the European Union (EU) rose 5.5%.

Currently, there is a 15% US tariff on imports from Japan. The automotive industry in particular has been affected by tariffs, especially as the US tariff on Japanese cars was only 2.5% at the start of the year. During August, the tariff on imported automobiles was 27.5%, although it has since been reduced to 15%. To offset the impact of US tariffs on the prices charged to US consumers, Japanese car companies have cut export prices, thereby taking a hit to their margins. Despite this, the volume of Japanese cars exported to the United States declined 9.5% in August from a year earlier. The value of shipments declined 28.4%.

It is possible that, with the tariff having been cut to 15%, Japanese car exports could become a bit more competitive. Still, the 15% tariff is a significant burden and might compel some Japanese car companies to shift more production to the United States. On the other hand, automotive assembly in the United States has been hit by steep tariffs on imported steel, aluminum, and copper. Plus, the United States has also planned to impose steep tariffs on imported semiconductors. Thus, it is not clear that assembly in the United States is more competitive than assembly in Japan.

For the Japanese economy, the decline in exports to the United States and to countries that assemble products for export to the United States will require a shift in focus. It is likely that the government will seek to boost domestic demand while companies will seek to boost exports elsewhere. In fact, it is reported that some Japanese automotive companies are targeting Latin America for greater sales, especially as these countries do not impose steep tariffs on imports from Japan.

Meanwhile, Japanese imports fell 5.2% in August from a year earlier. This included sharp declines in imports from the EU, Russia, Middle East, and Southeast Asia. This reflected weaker demand for and lower prices of commodities, including energy commodities. It also reflected weaker demand for industrial goods. On the other hand, imports from the United States increased sharply, driven by stronger demand for agricultural products, semiconductors, and consumer goods.

China indicators point to weakness

• The latest economic news from the Chinese government indicates a deceleration of economic activity in August. Although exports from China have remained relatively strong, even as exports to the United States have fallen sharply, indicators of domestic demand have weakened. Among the reasons for the slowdown are the potential spillover effect of weakened exports to the United States, especially after the surge in exports in anticipation of tariffs; government efforts to address excess capacity in industry; continued troubles in the residential property market; and weak consumer sentiment. Here are the details.

First, consider retail sales. In August, retail sales in China were up 3.4% from a year earlier, the slowest growth since November 2024. It was also the third consecutive month in which sales growth decelerated. Some categories of spending saw strong growth such as appliances (up 14.3%), which was driven by government subsidies for trade-ins, although such subsidies are fading out. Still, the overall weakness of spending likely reflects consumer pessimism and concern about lost wealth in the housing market.

In addition, Chinese industrial production increased 5.2% in August from a year earlier, the slowest growth since August 2024. The manufacturing component was up only 5.7% from a year earlier while utility output rose a modest 2.4%. Among the sectors with strong growth were automotive (up 8.4%), computers and communication (up 9.9%), and railway and shipbuilding (up 12%). Despite the slowdown, it is possible that production remains excessive given weak domestic demand and a likely slowdown in export growth in the coming months. Indeed, retail sales of automobiles rose only 0.8% in August from a year earlier.

Also, China’s fixed asset investment performed especially poorly, largely due to an accelerated downturn in property investment. In the first eight months of 2025, overall fixed asset investment rose a mere 0.5% from the same period a year earlier. This included a particularly sharp 12.9% decline in property investment. Investment in manufacturing rose a modest 5.1%. When property is excluded, overall investment rose 4.2%. Investment grew more slowly than at any time since the pandemic. Plus, the fact that the decline in property investment is accelerating suggests that the worst of the property crisis is not yet behind China.

The slowdown in the Chinese economy comes despite government efforts to boost domestic demand. Aside from the subsidies for trade-ins of appliances, the government last month said it will offer subsidies for interest on consumer loans. It is also planning to remove restrictions on consumption of consumer services. Yet consumers continue to react to the weakness in the property market, which has suppressed valuations. It is reported that house prices in the top 70 cities were down 2.5% in August from a year earlier. Although this was a smaller decline than in recent months, it was the 26th consecutive month of declining home prices. Until the property market stabilizes, it is likely that overall growth will remain muted.

Week of September 15, 2025

• US tariffs might be hurting US manufacturing
• Japan-US deal creates a new model for investment
• Change in immigration policy reduces employment in some industries
• US inflation continues to accelerate
• ECB leaves rates unchanged

US tariffs might be hurting US manufacturing

• The introduction of tariffs by the United States this year was meant, in part, to boost domestic manufacturing, especially by encouraging companies to re-shore processes to the United States. Although some re-shoring is taking place, some manufacturers are complaining that tariffs are hurting their competitiveness and forcing them to raise prices. The Institute of Supply Management (ISM) publishes its own purchasing manager’s index (PMI) for manufacturing, and the latest report indicates significant challenges for manufacturers that stem from tariffs. Recall that PMIs are forward-looking indicators meant to signal the direction of activity in the manufacturing sector. A reading above 50 indicates growing activity and vice versa.

The ISM PMI for manufacturing in August was 48.7, indicating a moderate decline in activity from the previous month. This included a rebound in new orders but a sharp reduction in output. There was also a reduction in export orders. In addition, backlogs of orders as well as employment were down.

More notable than the data are the commentaries by the surveyed purchasing managers themselves. One manager from the electronics industry said that “new product development costs continue to increase as tariff increases are announced.” In addition, this person noted that “our materials/supplies are now rising in price, so our sell pricing is again being reviewed to ensure we keep a sustainable margin. Plans to bring production back into the United States are impacted by higher material costs, making it more difficult to justify the return.”

Another purchasing manager, from the fabricated metals industry, said, “Export demand is falling as customers do not accept tariff impacts, which likely will require some production transfers out of the United States.” A purchasing manager from the transportation equipment industry said, “There is absolutely no activity in the transportation equipment industry. We are also in stagflation: Prices are up due to material tariffs, but volume is way off.”

Finally, someone from the appliance industry said, “Made in the USA has become even more difficult due to tariffs on many components. Total price increases so far: 24%, that will only offset tariffs. No influence on margin percentage, which will actually drop. In two rounds of layoffs, we have let go of about 15% of our US workforce. These are high-paying and high-skilled roles: engineers, marketing, design teams, finance, IT, and operations.” He added that “with no stability in trade and economics, capital expenditures spending and hiring are frozen.”

These comments offer insight into how tariffs are affecting decisions within the manufacturing industry. Higher costs of imported intermediate goods have undermined export competitiveness. Plus, uncertainty about the direction of policy is hurting investment spending. The result is declining employment and output. Perhaps the most stunning impact is the suggestion that companies might shift production overseas to service foreign markets.

In the past, very targeted tariffs were occasionally used by the United States to protect domestic producers, enabling them to boost their competitiveness. For example, this happened in the 1980s when a tariff on imported motorcycles saved the leading US motorcycle manufacturer from collapse. In this case, however, tariffs have been applied to imports of nearly every product from every country, with tariffs on imported inputs sometimes higher than the tariffs on final products. In such cases, domestic producers might wind up worse off than previously.

Japan-US deal creates a new model for investment

• When the United States and Japan announced a trade deal that put the US tariff on Japanese import at 15%, it was agreed that Japan would massively invest in the United States and would purchase a large amount of energy from the United States. The lack of specificity suggested that the deal merely set goals rather than firm targets. Yet a memorandum of understanding (MOU) signed by both countries recently provided insight into how the deal will take place.

The deal signed recently indicates that Japan will provide US$550 billion in funds to be invested in the United States. The deal gives Japan only 45 days to fund the projects or face higher tariffs. Moreover, the deal says that President Trump will solely decide how the money is invested. However, there will be a committee led by Commerce Secretary Lutnick that will provide Trump with options for investing the money.

Lutnick himself said that “the president has complete discretion on where these investments go.” He also suggested that a pipeline for liquid natural gas in Alaska could be one of the projects. Other potential areas of investment include semiconductors and pharmaceuticals. Although the projects will be chosen solely by the president, some Japanese business organizations will be consulted. Moreover, it is understood that materials and equipment from Japan will be utilized while the United States will provide land, water, utilities, and infrastructure. Also, although the original announcement of the deal said that the United States will keep 90% of the profits, the MOU said that the profits will be split equally. Finally, the program will expire on January 19, 2029, the day before Trump leaves office.

Several issues arise from this deal. First, if there is a significant boost to inbound investment in the United States, this implies an increase in the US trade deficit. The US current account deficit (which is mostly the trade deficit) is almost exactly offset by the US capital account surplus. The latter is the net inflow of capital into the United States. When the United States spends more on imports than it receives for exports, the money flows back to the United States as foreign investment. If the capital surplus increases, there is an increase in the current account deficit.

Second, in a market economy, the market determines the amount of investment that takes place, based on supply and demand for capital and based on whether investors can obtain a positive return. If the deal causes an increase in the supply of investment beyond what the market determines, this will lead to lower returns, all other things being equal. Moreover, given the low level of unemployment and a persistent shortage of labor, it is not clear that a large volume of new investment projects will have sufficient labor resources.

Third, having the US administration determine the allocation of capital is a move away from a market-based system of capital allocation. This follows the recent US injection of equity into public companies, with a promise to do much more of the same.

Fourth, the MOU is not a legally binding agreement. It is simply a road map. Thus, either side could easily decide not to abide by some aspect of the deal. As such, some companies on both sides of the Pacific might be reluctant to participate without a more solid legal foundation.

Meanwhile, Japanese foreign direct investment (FDI) into the United States increased 20% in the first seven months of 2025 versus a year earlier. This happened while Japan’s overall outbound FDI increased only 4%. For July alone, FDI was down 10% while outbound FDI into the United States was up 19%.

In the first seven months of the year, Japanese outbound FDI into Mexico fell 21% from a year earlier. This means Japanese companies became less optimistic about the future of economic relations between the United States and Mexico. Most of the Japanese investment into Mexico involves developing capacity to export to the United States. Meanwhile, Japanese outbound FDI into China fell 6%, likely affected by the worsening of relations between the United States and China.

The sharp increase in Japanese investment in the United States is probably meant to reduce exposure of Japanese companies to US trade restrictions. As such, it appears that some Japanese companies are betting that high tariffs are here to stay and that shifting supply chains to the United States can reduce risk.

Change in immigration policy reduces employment in some industries

• The shift in US immigration policy is becoming evident in the job market data, according to a new analysis conducted by the Peterson Institute. The analysis divided the US job market into two pools: one in which industries are more reliant on unauthorized immigrant labor; the other being the rest of the private sector. The analysis found that employment in both pools increased at roughly the same pace throughout 2023 and the first half of 2024. Since the start of this year, however, employment in the immigrant pool has been either flat or falling while the non-immigrant pool has seen persistent increases. Thus, the shift in immigration policy appears to have halted job growth in those industries dependent on unauthorized immigrants.

The industries where unauthorized immigrants are important are construction, several manufacturing industries, several technology and research industries, hotels, restaurants, building and landscaping services, warehousing and storage, repair and maintenance services, and home health aides. There has been no job growth in this group of industries since early this year. Notably, the lower availability of immigrant workers has not been offset by increased employment by native born workers.

The unemployment rate among native born workers has increased during the course of 2025. As such, it appears that the net effect of the new immigration policy may be to slow labor market growth and, commensurately, slow economic growth. In those industries in which a shortage of workers is emerging due to immigration policy, it is likely that there will be higher prices as a result. Indeed, this is already happening in some agricultural products.

US inflation continues to accelerate

• Recently, all three major US equity market indices hit record highs. And yet, on the same day, data released by the US government indicated that inflation is starting to be a problem while other data found that the number of people applying for unemployment insurance hit the highest level in four years. Thus, the much-discussed stagflation scenario appears to be emerging.

Why, then, are investors so optimistic about equities? I can think of two explanations. First, investors are increasingly confident that the Federal Reserve will soon start to cut interest rates. Second, investors remain euphoric about AI. After all, the share price of one tech company rose 36% last week following publication of highly optimistic revenue forecasts. This had a positive spillover effect on the share prices of other companies, and not just tech companies. It also influenced energy companies that must generate electricity to power AI.

In any event, let’s look at the economic data, beginning with inflation. In August, consumer prices were up 2.9% from a year earlier, the highest rate since January 2025. Prices were up 0.4% from the previous month, the highest monthly rate since January. When volatile food and energy prices are excluded, core prices were up 3.1% in August versus a year earlier, the same as in July and the highest since January. Core prices were up 0.3% from the previous month.

While inflation remains at a level not necessarily considered onerous, it is clearly accelerating. Moreover, in some categories there have been substantial price increases, reflecting either the impact of tariffs or the loss of labor supply due to the change in immigration policy. For example, the price of beef and veal was up 13.9% in August from a year earlier. There have been press reports that meat-processing companies have seen a sharp loss of employees due to government raids against unauthorized migrants. Also, the price index for durable goods was up 1.9% in August from a year earlier. While this is a small number, it is the biggest gain since November 2022. This rebound is likely due to tariffs on imports from Asian countries.

Meanwhile, the government reported that, in the most recent week, there were 263,000 initial claims for unemployment insurance. This was the highest level since October 2021. It is consistent with other data indicating weakening of the US job market.

As economic data has weakened lately, there has been a sharp decline in US bond yields. Since the beginning of this month, the yield on the 10-year government bond has fallen from 4.25% to 4.01%. This is interesting because it has happened as inflation expectations have remained elevated but stable. Clearly, investors have pushed down bond yields not because they have lowered their expectations of inflation. Rather, it likely reflects a worsening of expectations for the economy as well as growing expectations for monetary policy easing.

Meanwhile, there are plenty of reasons to expect bond yields to rebound in the near term. These include the prospect of rising inflation, a possible reduction in the independence of the Federal Reserve, rising concern about the sustainability of US fiscal policy, and further capital outflows from the United States due to reduced involvement in the global economy.

ECB leaves rates unchanged

• The European Central Bank (ECB) left its benchmark interest rate at 2% earlier this month. This was the second consecutive month in which the interest rate was unchanged. Since last September, the gap between the benchmark rates of the ECB and the Federal Reserve has been rising as the ECB cut rates while the Fed left rates unchanged. This situation is about to reverse. The Fed is widely expected to cut rates this month and to continue in the months ahead while the ECB keeps rates steady. Thus, the gap will diminish. That, in turn, will likely reinforce the downward movement of the US dollar against the euro. Indeed, the euro was up sharply on the ECB news.

Meanwhile, the decision by the ECB to stop cutting rates reflects a view that inflation has stabilized and that the economy’s prospects have improved. ECB President Lagarde said that “the disinflationary process is over.” She added that inflation is “where we want it to be.” Moreover, the US trade policy has created uncertainty about the future direction of inflation. One can imagine scenarios in which the US tariffs cause Eurozone inflation to decline or to rise. If the tariffs weaken the Eurozone economy, they could be disinflationary. If, however, the tariffs boost the global price of goods exported from the United States, they could be inflationary.

Week of September 8, 2025

• US job growth is slowing down
• The latest on China
• Inflation accelerates in the eurozone

US job growth is slowing down

• In the last four months of 2024, the US economy generated 868,000 new jobs. Then, in the first four months of 2025, the US economy generated 491,000 new jobs. Now, we learned that, in the most recent four months of 2025, the economy generated only 107,000 new jobs. The latest employment report, which was released at the time of writing, revealed a labor market that is slowing, raising questions about economic growth in the second half of 2025. The US Department of Labor releases a monthly report based on two surveys: one is a survey of establishments; the other is a survey of households. Let’s look at the data:

1.First, let’s look at the establishment survey. It indicated that, in August, only 22,000 new jobs were created from the previous month. Moreover, the June and July numbers were revised, with the new data showing a decline in employment in June but somewhat faster employment growth for July than previously reported.

In August, job growth was either feeble or negative in most industries. The major exceptions were health care and social assistance (up 46,800), and leisure and hospitality (up 28,000). When these two categories are excluded, the numbers show that there was a sharp decline in employment in August. By industry, employment was down 7,000 in construction, down 12,000 in manufacturing, down 5,000 in information, down 3,000 in financial services, down 17,000 in professional and business services, and down 16,000 in government. Why was job growth slow in recent months? Among the explanations are the impact of tariffs on expectations for demand; the impact of tariff uncertainty on business investment; and the impact of immigration policy on labor supply.

The establishment survey also provides data on earnings. It indicated that, in August, average hourly earnings of private sector workers were up 3.7% from a year earlier—the second lowest rate of increase since May 2021. Thus, wage pressure is gradually easing, given the weak demand for labor. Fortuitously for workers, earnings are rising faster than inflation, thereby boosting household purchasing power. Even as demand for labor decelerates, the supply of labor is falling, in part due to restrictive immigration policy. However, if inflation accelerates sharply due to tariffs, it will undermine consumer purchasing power.

2. The separate household survey offered a somewhat more favorable view of the job market. The household survey includes data on self-employment. The survey found that the labor force grew faster than the working-age population, leading to a small increase in the rate of participation. Yet employment grew considerably more slowly than the labor force, thereby leading to a slight increase in the unemployment rate. It hit 4.3%—the highest since October 2021. There was a sharp increase in the unemployment rate for workers lacking a high school education but no change for college graduates. Thus, it appears that unskilled workers are facing obstacles to employment.

In response to the jobs report, the yield on the US Treasury’s 10-year bond fell to 4.1%—the lowest in 10 months. This reflects expectations that the economy is weakening, thereby reducing inflationary pressures and increasing the likelihood of the Federal Reserve easing monetary policy. Equity prices fell as well.

What about the Fed? The futures markets are now pricing an 89% probability that the Fed will cut the benchmark rate by 25 basis points this month and a 10% chance of a 50-point cut this month. Moreover, there is a 91% probability that the Fed will cut the rate two or three times before the end of the year, and a zero likelihood of no rates cuts by December. This includes a 64% probability of three rate cuts by the end of the year. In other words, many investors are now highly optimistic that the Fed may engage in an aggressively easy monetary policy.

• In the United States, the number of job openings fell in July from the previous month, hitting the lowest level since September 2024. The largest decline was in the South followed by the Northeast. The West saw an increase in job openings. The job openings rate (share of available jobs that are unfilled) hit 4.3% in July. This is the same as in March 2025 and September 2024. The job openings rate has not been lower than this since May 2020, at the height of the pandemic. This indicates a weakening of the job market. On the other hand, the labor market remains relatively tight compared to the pre-pandemic period. In most of the two decades prior to the pandemic, the job openings rate was lower than it is now. The current tightness reflects demographics and, lately, a shift in immigration policy. That is, labor force growth has slowed while demand for labor has slowed as well.

By industry, the job openings rate was highest in information, accomodation and food service, and professional business services. The rate was lowest in mining, wholesale trade, and durables manufacturing.

From a year ago, the overall job openings rate fell from 4.5% to 4.3%. However, in some industries, there was a notable increase in the job openings rate. These industries included construction, transportation and warehousing, information, and accomodation and food service. Some of these industries are heavily dependent on migrant labor. The drop in immigration and the increase in deportations might explain some of this increase. It could also lead to stronger wage pressure in these industries, thereby exacerbating inflation. On the other hand, some industries saw a sharp decline in the job openings rate. These included mining, durable goods manufacturing, and health care and social assistance. The decline for manufacturing could be related to trade uncertainty and disruption.

The state of the US job market has weakened. Still, the job openings rate is relatively high while the unemployment rate is relatively low. Thus, it is not clear if the weakness is sufficient to cause concern about the economy being sufficiently weak, to warrant an easing of monetary policy. The Federal Reserve has a dual mandate to seek low inflation and maximum employment. Currently, inflation is above the Fed’s target and appears to be accelerating while employment growth has eased. Thus, the Fed faces a trade-off.

Meanwhile, one sign of economic strength is that financial market conditions in the United States are relatively favorable. This is evidenced by the national financial conditions index published by the Federal Reserve Bank of Chicago. That index shows that, currently, the United States has the most favorable financial market conditions since November 2021, during the pandemic. This is due to the lagged effect of the Fed’s easy monetary policy, which began in 2024. Given that conditions are so favorable, it is not clear that it makes sense to ease policy further at a time when inflation is a growing concern. Prior to the pandemic, the index was even more favorable in the 2018-to-2020 time frame. Yet that was a time of historically low inflation. As such, there was no need to tighten monetary policy at that time.

On the other hand, household financial conditions have worsened, with the delinquency rate on credit card debt now at the highest level since just after the global financial crisis in 2011. The delinquency rate on automotive loans has also increased considerably. Plus, the end of the moratorium on student debt has led to a further increase in financial stress for student debtors. The challenges faced by the household sector provide an argument in favor of monetary easing.

As indicated above, it is nearly a certainty that the Fed will cut the benchmark interest rate later this month, likely starting a gradual process of easing monetary policy. This could come in conjunction with a further acceleration in inflation. That would be an unusual combination of events.

The latest on China

• US Treasury Secretary Bessent recently said that foreign companies are eating the tariffs, thereby reducing the impact on US importers and US households. Yet, with respect to China, a study conducted by China International Capital Corporation (CICC) suggests otherwise. Specifically, CICC found that Chinese exporters have absorbed only 9% of the US tariffs. For example, from April through July, Chinese exporters cut their prices by 2.4% while the United States imposed an effective tariff rate of 27% on imports from China.

This means that the absorption of the tariffs is mostly taking place on the US side of the Pacific Ocean. CICC suggests that US importers are largely absorbing the cost and not yet fully passing on the cost to their US customers. CICC commented that “US importers, sandwiched in the middle of supply chains, find it difficult to fully pass costs to the end market or shift the burden entirely to exporters, so they cope by compressing profit margins.” My view is that, ultimately, these importers will likely push the cost onto their customers in the United States, thereby avoiding a sustained compression of profits.

Meanwhile, it has been reported that exporter absorption of tariff costs has been much greater in Southeast Asia and Europe, than in China. CICC says this reflects the highly competitive nature of Chinese exports. Still, Chinese exports to the United States are down sharply as many importers are frustrated with much higher prices. It is reported that Chinese exporters are struggling to sell to the United States, worried that weak sales will result in idle factories.

• China’s role in the world is adjusting in response to the disruption of US trade policy. In recent years, the US government was concerned about the growing economic and geopolitical footprint of China in the Asia-Pacific region. In response, the United States intensified alliances with like-minded countries. Of particular note was the creation of the so-called “Quad,” a military/intelligence alliance involving the United States, Japan, Australia, and India. In addition, the United States encouraged private business to “de-risk” from China by diversifying supply chains and shifting processes from China to Southeast Asia and India.

Now, things are changing. And it largely reflects the impact of a shift in US trade policy toward India. Until recently, the United States worked hard to deepen ties with India, largely as an offset to the rising power of China. Yet relations have soured following the imposition of a 50% tariff on imports from India. The stated reason for the 50% tariff was Indian purchases of Russian oil.

India has indicated it will not back down. Meanwhile, China has taken advantage of the situation by trying to enhance relations with India as well as Russia. Last week, the leaders of all three countries were together in China. China’s leader said that the three countries should be partners. This was the first visit of India’s prime minister to China in seven years.

• Chinese equity prices hit a 10-year high this week as investors exhibited optimism about the business environment despite the challenge of uncertain trading relations with the United States. In addition, China’s money supply is growing at a rapid pace, thereby boosting liquidity. This often has a positive impact on asset prices. Relatively easy monetary policy has evidently played a role in boosting equities.

Meanwhile, it is reported that China’s savers—with their US$22 trillion in liquid assets—are shifting from fixed-income products to equities, betting that China’s technological prowess will pay off for investors. In addition, it is reported that global investors are becoming more interested in Chinese equities.

The yield on China’s 10-year government bond is currently about 1.7% while the one-year deposit rate offered by commercial banks is only 1%. Thus, equities have become very attractive. Notably, global equities have done well lately—not just those of China. The US equity market, for example, has been especially strong despite signs that the economy is likely weakening. In the United States, equity market strength is probably related to optimism about generative AI.

Also, the Chinese economy continues to show signs of weakness. Equities are not likely to remain frothy if the economy doesn’t start to rebound. Still, investors are evidently betting that China’s growing strength in key technologies will pay off.

Inflation accelerates in the eurozone

• In the 20-member eurozone, consumer price inflation accelerated slightly in August. Prices were up 2.1% from a year earlier—the highest rate of inflation since April. When volatile food and energy prices are excluded, core prices were up 2.3% from a year earlier—the same as in each of the previous three months. Thus, underlying inflation is stabilizing at a relatively low level. Notably, the price of services was up only 3.1% from a year earlier—the lowest level since March 2022. The high level of services inflation had been a major concern for the European Central Bank (ECB). Now that it is coming down, it sets the stage for sustained low inflation.

  However, the fact that underlying inflation has stalled above the ECB’s 2% target adds strength to the argument that the ECB will not cut the benchmark interest rate again during 2025. For now, futures markets are pricing in a 50% probability of a rate cut by the end of the year. The ECB’s policy committee will meet in September and December. Most analysts expect no rate cuts in September. Indeed, at the last policy meeting, ECB President Lagarde said the central bank has a “wait and watch” policy. 

  One reason for the ECB’s hesitation is the US policy of tariffs. While the tariffs directly increase prices for US households and businesses, there can be an indirect impact on prices in other countries. Isabel Schnabel, who serves on the ECB’s governing council, said that “if you have an increase in input prices globally due to tariffs, and these propagate through global production networks, this will increase inflationary pressures everywhere.” As such, she said that, for the eurozone, “the balance of risk” is “tilted to the upside.”

Week of September 1, 2025

• Potential changes to the Fed
• A pivot toward state capitalism in the United States

Potential changes to the Fed

• President Trump’s recent announcement that he intends to remove Fed Governor Lisa Cook led to a decline in the yield on the two-year bond (signaling an expectation of a looser monetary policy) and an increase in the yield on the 10-year bond (signaling an expectation of higher inflation). Cook has indicated that she will fight the effort to remove her.

The President has said that the benchmark interest rate should be cut by 300 basis points while Treasury Secretary Bessent said it should be cut by 150 basis points. Either way, this would lead to a sharply negative inflation-adjusted rate at a time when inflation is rising. That would be highly unusual. Theoretically, lower rates could boost the economy, at least temporarily.  

As a recap, the primary policymaking body at the Fed is the Federal Open Market Committee (FOMC). It is composed of the seven members of the Board of Governors (all of whom are appointed by the President and confirmed by the Senate, and who serve staggered 14-year terms) as well as a rotating group of five of the 12 presidents of regional Federal Reserve Banks. The regional presidents are chosen by the commercial banks that are members of the Federal Reserve system but must be approved by the Board. In addition, the law allows the Board to remove regional presidents. Several regional president’s terms expire in 2026.  

Aside from Chairman Powell, who was originally appointed by Trump and then re-appointed by President Biden, two members of the Board were appointed by Trump: Christopher Waller and Michelle Bowman. Recently, board member Adriana Kugler resigned and Trump appointed Stephen Miran to replace her. He has not yet been confirmed by the Senate. If Cook is removed, Trump will then appoint a replacement for Cook and will have appointed four members. Next year, he will have the opportunity to replace Powell.

Christopher Waller, a member of the Board of Governors of the Federal Reserve, is considered one of the candidates to replace Chair Powell next year. In the past, he seemed predisposed toward a focus on minimizing inflation by keeping interest rates higher than otherwise. Yet in the most recent meeting of the FOMC, he was one of only two members who supported cutting rates. He indicated that he could potentially support a “jumbo” cut to interest rates in September. This could suggest that the Fed will soon move toward a far easier monetary policy.

Specifically, although Waller said that he did not “believe that a cut of larger than [0.25 percentage points] is needed in September,” he nevertheless said that his view “could change if the employment report for August, due out [soon], points to a substantially weakening economy and inflation remains well contained.” Waller added that “in July, I argued that, looking through tariff effects, with underlying inflation near target and the upside risks to inflation limited, the FOMC should not wait until the labour market deteriorates before we cut the policy rate. Based on all the data in hand, I believe this argument is even stronger today, and that the downside risks to the labour market have increased.”  

Although it appears that the Fed will cut its benchmark rate in September, the bigger question involves what the Fed is likely to do in the months to follow.

A pivot toward state capitalism in the United States

• Two weeks ago, the US government took a 10% stake in the largest US-based producer of semiconductors, which has lost market share to foreign competitors. Under the Biden-era CHIPS Act, the US government promised the US-based chip maker grants and loans of as much as US$20 billion, meant to help it boost investment in the United States. This, along with subsidies for other companies, was meant to revitalize US chip-making so that the country would be less dependent on Asia.

  Will this investment be successful? It is not clear. One estimate suggests the chipmaker will need US$50 billion over the next few years to develop appropriate capacity. At the same time, foreign competitors are making big investments in fabrication plants in the United States, using CHIPS Act subsidies, but are not likely to sell shares to the US government. Meanwhile, chip fabricators in the United States already face a serious shortage of labor with the required skills. One foreign chipmaker is reported to be bringing its own workers to the fabrication plant it developed in the United States.

  If the investment were a one-off event, it would not necessarily generate much controversy. In 2008, the Bush Administration injected equity into several large banks, the aim of which was to prevent a complete meltdown of the financial system. In 2009, the Obama Administration injected equity in automakers, the goal of which was to prevent a collapse of the US automotive industry. In both cases, the government got out quickly. What the current administration is doing is different.

  President Trump, speaking about the latest transaction, said, “I will make deals like that for our country all day long. I will also help those companies that make such lucrative deals with the United States.” He described his economic strategy as “to get as much as I can.”

  Other people within the Administration have offered similar sentiments. Secretary of Commerce Howard Lutnick said that defense contractors could be targeted. Speaking about a large defense contractor, he said: “It makes 97% of their revenue from the federal government. If we are adding fundamental value to your business, I think it's fair for Donald Trump to think about the American people.” Kevin Hassett, director of Trump’s National Economic Council, said, “I'm sure that at some point there will be more transactions, if not in this industry in other industries.” He suggested that such transactions could be the first step toward creating a US government sovereign wealth fund (SWF). The president has said he wants one and has expressed admiration for the SWFs in the Middle East.

  Meanwhile, the chip transaction is not the only event involving greater US government intervention in the private sector. The government only approved of a Japanese takeover of an American steel company after the company gave the United States a “golden share,” thereby giving the government some influence in the company’s decisions. In addition, the Pentagon has taken a 15% stake in a company that produces a mineral used in high strength magnets. The United States also allowed two US tech companies to sell advanced technology to China if they share the revenue with the US government. Finally, tariffs, and especially tariff exemptions, put the government in a position to influence the private sector.

  If the US government becomes a shareholder in companies, what are the implications? For example, in China the state-run sector is widely seen as being less innovative and productive than the private sector. There may be constraints on the ability of such companies to dismiss workers, shut down facilities, or offer competitive compensation to executives. Government ownership may influence government decision-making, with the government favoring its own companies over others.

  If the United States creates an SWF, then it could effectively become operator of something akin to a private equity firm. This means picking investments on behalf of taxpayers. The long US history of a robust and independent private sector has often been seen as one of the sterling attributes of the US economy. Changing it has considerable risks.