Economic Monitor – Weekly Commentary
by Eugenio Alemán

Lost opportunity, closed window and measurement issues

June 6, 2025

Chief Economist Eugenio J. Alemán discusses current economic conditions.

The Federal Reserve (Fed) lost its chance to lower interest rates further during the first half of the year, when inflation came down to close to its 2.0% target with very limited risk that its decision would have triggered higher inflation. It was probably concerned with a measure of inflation expectations, coming from the University of Michigan (UM) Survey of Consumers, which has been flashing red for several quarters. However, other measures of inflation expectations that are more market-based have continued to flash ‘smooth sailing ahead,’ which means that the survey from the UM has remained an outlier.

At the same time, the Fed Chairman has been repeating for almost a year that wage increases are no longer a source of inflationary pressures, something we agree with. But perhaps the most important difference between today and the post-pandemic environment is that then American consumers were awash in cash from the accumulation of excess savings due to the increase in income transfers from the federal government.

Today, while households have increased how much they are saving compared to their income, the saving rate is very low compared to what it was after the pandemic recession. That is, there is not much air underneath prices that could sustain inflation higher in the longer term, as it was the case during the recovery from the pandemic.

Yes, we are going to see higher inflation because of the effects of tariffs across the US economy but that increase is going to be short-lived, or at least short-lived compared with what happened in the aftermath of the pandemic. That is, we understand why policymakers felt so risk averse during the first half of the year when they decided to stop lowering interest rates, however, they could have continued to lower interest rates during the first half without adding to inflation concerns. However, today, that window has closed, and it is highly unlikely that they will lower the federal funds rate during the next several months. At the same time, as a newspaper reported this week, there are many analysts and investors who are concerned that inflation measures are not going to paint a correct picture of inflation due to recent cuts in the federal work force, but specifically within the statistical institutes that put together these estimates.

Economists have been complaining about Congressional decisions to cut funding for statistical institutions like the BLE, the BEA, the Census, etc., for decades, it is not something new to the current administration. However, DOGE and its obsession with firing government employees has affected these institutions particularly hard. According to recent reports, the Bureau of Labor Statistic (BLS), which is the institution in charge of measuring the Consumer Price Index, has had to rely on “alternative guessing methods,” to estimate the rate of inflation. Furthermore, other economic indicators are published with a delay, which makes analysis of the economy more difficult.

If these issues are correct, and we believe they are, this is probably adding to recent market concerns that are affecting yields across the different maturities, as investors try to figure out what is happening in the economy, knowing that the information being released may no longer be reliable.

Economic and market conditions are subject to change.

Opinions are those of Investment Strategy and not necessarily those Raymond James and are subject to change without notice the information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. There is no assurance any of the trends mentioned will continue or forecasts will occur last performance may not be indicative of future results.

Consumer Price Index is a measure of inflation compiled by the U.S. Bureau of Labor Studies. Currencies investing are generally considered speculative because of the significant potential for investment loss. Their markets are likely to be volatile and there may be sharp price fluctuations even during periods when prices overall are rising.

The National Federation of Independent Business (NFIB) Small Business Optimism Index is a composite of ten seasonally adjusted components. It provides a indication of the health of small businesses in the U.S., which account of roughly 50% of the nation's private workforce.

The producer price index is a price index that measures the average changes in prices received by domestic producers for their output. Its importance is being undermined by the steady decline in manufactured goods as a share of spending.

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