Speech lled for a significant step-down in the pace of PCE growth this year, but that sizable slowdown hasn’t happened. One factor that may help explain this is that the savings rate has been revised notably upward, resulting in higher disposable personal income and more support for spending. It is possible that resilient spending will help convince businesses to maintain staffing and even expand in the coming months, bringing about a recovery in job creation. Another possibility is that r*—the interest rate below which monetary policy stimulates demand—is higher than most forecasters believe. If this were true, then the current setting of monetary policy may not be holding back demand and economic activity very much, which would have implications for how quickly the FOMC should lower the policy rate.

Those are some reasons why the labor market may strengthen and validate the story being told, based on what we know so far, about economic activity in the third quarter. On the other hand, there are some reasons why the labor market could continue to soften while GDP growth steps down to a more moderate pace. For me, one of them is how dependent consumption is on a relatively small number of higher-income consumers. The highest-earning 10 percent of households are responsible for 22 percent of personal consumption. The top 20 percent of households spend 35 percent of the total. Their share of stock market wealth is even more skewed, and lots of research shows that these consumers are fairly unaffected by higher prices, higher unemployment, or a slower economy. The bottom 60 percent of earners represent 45 percent of consumption and hold only 15 percent of wealth. Their spending decisions are much more likely to be affected by prices, financing conditions, and job availability. I have heard from business contacts that this group has been affected by higher prices this year and is already changing its spending plans to find better value.

That view was echoed in the Federal Reserve’s recently released Beige Book, which is a survey of business contacts.7 The consensus view across the country is that while consumer spending inched down in recent weeks, spending by higher-income households on luxury travel and accommodation was strong; lower- and middle-income households continued to seek discounts and promotions in the face of rising prices and elevated economic uncertainty. At what point do higher prices prompt a larger cutback in spending by middle- and lower-income people?

Another reason for a greater weakening of the labor market is that artificial intelligence (AI) may reduce demand for workers. Over the past few months, retailers have told me that they will reduce employment next year because of the efficiency gains from AI. Firms are saying that they can and will replace workers in call centers and IT support with AI robots. This echoes what I read recently about the largest private employer in the United States: Walmart. Walmart says that despite expectations of solid sales growth, it plans to hold net employment steady for the next three years as AI replaces or transforms different roles at the company.

That said, while AI adoption is widespread among large firms, it is not nearly as common among smaller firms, which account for a large share of the U.S. economy, so the impact of AI on labor demand is uncertain. The implication of this for monetary policy is not so clear. Monetary policy addresses cyclical fluctuations in the economy, but if AI constitutes a structural shift in the demand for labor, monetary policy will not be an effective tool. Overall, I see AI as a short-term risk for the labor market, but, in the long run, AI should bring productivity gains that will be welfare improving.8

So where does all this leave monetary policy? Tariffs have modest effects on inflation, but with underlying inflation close to our goal and expectations of future inflation well anchored, I believe we are on track toward the FOMC’s 2 percent goal. As a result, my focus is on the labor market, where payroll gains have weakened this year and employment may well be shrinking already. Lower labor supply has surely reduced what would be a good monthly rate of job creation, but I am very skeptical that it could be zero, or a negative number. Based on all of the data we have on the labor market, I believe that the FOMC should reduce the policy rate another 25 basis points at our meeting that concludes October 29. But beyond that point, I will be looking for how the solid GDP data reconcile with the softening labor market.

If GDP growth holds up or accelerates and the labor market accordingly recovers, it might be an indication that policy is less restrictive than I thought and that the pace toward a neutral setting for the policy rate should be slower than I expected at the last FOMC meeting. What I would want to avoid is rekindling inflationary pressure by moving too quickly and squandering the significant progress we have made taming inflation.

On the other hand, if the labor market continues to soften or even weaken and inflation remains in check, then I believe the FOMC should proceed to reduce the policy rate toward a neutral level, which I judge is about 100 to 125 basis points lower than it is today. The labor market has been sending some clear warnings lately, and we should be ready to act if those warnings are validated by what we learn in the coming weeks and months.

Thank you.

1. The views expressed here are my own and are not necessarily those of my colleagues on the Federal Reserve Board or the Federal Open Market Committee. Return to text

2. Some have suggested that this could be the result of higher productivity growth. However, technology that improves labor productivity leads firms to demand more labor not less. Later in these remarks, I consider whether AI may be contributing to the decline in recent net job creation, an effect on the margin of the huge U.S. labor market, but it seems too soon in AI’s adoption for it to have significantly raised productivity across the entire economy. Return to text

3. For a full discussion of how I was viewing this puzzle at the time, see Christopher J. Waller (2022), “Monetary Policy in a World of Conflicting Data,” speech delivered at the Rocky Mountain Economic Summit, Victor, Idaho, July 14. Return to text

4. For a detailed discussion of the methodology to detect tariff effects on inflation, see Robbie Minton and Mariano Somale (2025), “Detecting Tariff Effects on Consumer Prices in Real Time,” FEDS Notes (Washington: Board of Governors of the Federal Reserve System, May 9). Return to text

5. ADP’s National Employment Report is available on its website at https://adpemploymentreport.com/. Return to text

6. The September 2025 Business Leaders Survey is available on the New York Fed’s website at https://www.newyorkfed.org/medialibrary/media/Survey/business_leaders/2025/2025_09blsreport.pdf?sc_lang=en&hash=872CB84D638D0F3D1A3F833365E25EF4; information from the most recent Survey of Consumer Expectations is also available at https://www.newyorkfed.org/microeconomics/sce#/. Return to text

7. The October 2025 Beige Book is available on the Federal Reserve Board’s website at https://www.federalreserve.gov/monetarypolicy/publications/beige-book-default.htm. Return to text

8. For more discussion of how I see AI affecting the economy, see Christopher J. Waller (2025), “Innovation at the Speed of AI,” speech delivered at DC Fintech Week, Arlington, Va., October 15. Return to text