Opinion: The Fed raised rates on a labor market that was already breaking down

On Sept. 16, Federal Reserve Chair Kevin Warsh led the Federal Open Market Committee through its first interest-rate increase since July 2023, lifting the benchmark federal funds rate a quarter point to a range of 3.75 to 4 percent. The vote was unanimous, 12-0. The committee's own statement that day described an economy "expanding at a solid pace," with "job gains" that "have kept pace with the workforce" and an unemployment rate that "has changed little." Inflation remained "elevated," the Fed said, and tightening credit would help "support a timelier return" to its 2 percent target.

Sixteen days later, the data that justified that confidence came apart. On Oct. 2, the Bureau of Labor Statistics reported that employers added just 29,000 jobs in September, far short of the 90,000 economists had forecast, according to FactSet. The unemployment rate, which the Fed had just described as having changed little, ticked up to 4.2 percent. And the two months behind it were worse than first reported: July's already-soft initial reading of 21,000 jobs was revised down to an outright loss of 10,000, and August's gain was cut by 29,000. Combined, the government erased 60,000 previously reported jobs — almost exactly the shortfall between September's actual hiring and what forecasters had expected.

A rationale that didn't survive three weeks

None of this makes Warsh a villain, or even obviously wrong on the narrow question in front of him. But it does expose a mismatch at the center of current economic policy: the Fed is fighting inflation with a tool built for an overheating economy, while the inflation actually driving its decisions has a different, more specific source.

• Nonfarm payrolls rose 29,000 in September, versus a forecast of 90,000
• Unemployment rose to 4.2 percent from 4.1 percent in August
• July and August payroll gains were revised down by a combined 60,000 jobs
• Average hourly earnings rose 3.0 percent over the year, among the slowest readings in years

Only two sectors showed real momentum: health care, up 17,000 (slower than its prior 12-month average of 33,000), and construction, up 11,000. Financial activities lost 7,000 positions. "Only healthcare and construction were hiring, and it was weak," said Heather Long, chief economist at Navy Federal Credit Union, after the report's release. "Across America, people don't like this labor market. It's not hard to see why. There's still not much hiring going on."

An inflation the rate hike can't touch

The inflation Warsh's committee cited on Sept. 16 is not, by most accounts, the product of consumers chasing scarce goods with easy credit. It has a more specific address: the Strait of Hormuz. Since the United States and Israel opened their war on Iran on Feb. 28, oil and refined-product exports through the strait — which carried roughly a fifth of the world's seaborne crude trade before the conflict — have fallen to a fraction of normal levels. The International Energy Agency's 32 member countries, including the United States, responded in March with the largest coordinated emergency oil-stock release in the agency's history: 400 million barrels, only the sixth such collective action since the IEA's founding in 1974. It was not enough to erase the shock. Gasoline prices still rose 3.9 percent in a single month, August, accounting for more than a third of that month's overall inflation, and overall energy costs rose 2.1 percent, according to the Bureau of Labor Statistics' consumer price index.

Layer onto that the administration's tariffs, which Cleveland Federal Reserve Bank President Beth Hammack has said are keeping businesses from committing to new hires amid uncertainty over costs, and the picture looks less like excess demand than like a supply problem arriving at a worse price. PBS NewsHour summarized the broader pattern plainly in its reporting on the September numbers: the labor market has had to absorb "trade wars, persistent inflation, high interest rates and a conflict with Iran that has driven energy prices higher."

An interest-rate increase is not built to fix any of that. Raising the cost of borrowing works by discouraging spending — that is the entire mechanism. It does nothing to reopen a blockaded shipping lane or settle a tariff dispute. What it reliably does is make it marginally more expensive for an employer already nervous about energy costs and tariff whiplash to add a worker, or for a household already paying more at the pump to take out a car loan or a mortgage. If September's hiring slowdown has more to do with war and trade policy than with the price of money, a rate increase stacked on top addresses the fever by also restricting the patient's food.

The strongest case for raising anyway

The Fed's defenders have a serious response, and it deserves real weight. Inflation expectations do not stay anchored on their own; a central bank that waves off a war- or tariff-driven price shock as temporary, and turns out to be wrong, inherits a credibility problem that is far more expensive to unwind later than a single soft jobs report is now. Core consumer prices were still running at 2.4 percent over the prior year when the committee met — above target, even if closer to it than headline inflation — and wages were growing only 3 percent annually, meaning real incomes were already being squeezed regardless of what the Fed did next. A central bank that sat on its hands while prices climbed through a war most Americans did not choose, and a tariff regime they did not individually vote on, could just as easily be accused of letting inflation run loose. On the information the committee had on Sept. 16, raising rates was not an unreasonable call.

"Across America, people don't like this labor market. It's not hard to see why. There's still not much hiring going on." — Heather Long, chief economist, Navy Federal Credit Union

That defense, though, cuts in both directions. If the Fed's job is to look past supply shocks it cannot fix — gasoline prices, a blocked strait, a tariff schedule set by the executive branch — then the burden shifts to the branches of government that actually control the war and the tariffs to stop feeding the inflation the Fed is left to fight with the only blunt tool it has. It is worth remembering that Warsh spent months before his May confirmation arguing publicly that the Fed had room to lower rates. He delivered a hike instead, not because he changed his mind about the economy, but because the data in front of him in September left little room to do otherwise. Three weeks later, different data said something else.

Who absorbs the mismatch

The gap between the Fed's September rationale and the September jobs report is not just an awkward six-week window. It is a preview of who pays when war policy, trade policy and monetary policy pull in different directions at once. It is not the officials who ordered the strikes on Iran, or who set the tariff schedule, who absorb the cost of tighter credit. It is the worker turned down for one of the few new slots on a construction crew in a month when the industry added just 11,000 jobs nationwide, or the jobseeker discovering that healthcare and construction were the only employers adding meaningfully to payrolls at all.

Warsh and his colleagues will get another chance to weigh this when the committee meets again this month, and they will do so with a clearer, if grimmer, picture than the one they had in September. The honest case for holding rates steady, or even reversing course, rests not on second-guessing the Fed's math but on recognizing that the inflation it is fighting was manufactured largely by decisions made outside the Eccles Building — a war launched without a congressional vote and a tariff policy still being negotiated in public, in real time. Congress and the White House, not the Federal Open Market Committee, hold the actual levers that could relieve that pressure: a diplomatic resolution that reopens oil flows through Hormuz, or tariff certainty that lets employers plan past the next quarter. Until one of those levers moves, every rate decision the Fed makes will keep landing on a labor market that is already absorbing costs it did not create, for a war and a trade fight it did not choose.