Posted on September 4, 2025
In trying to identify whether the time is right to lower short-term interest rates, the Federal Reserve continues to assess data on the state of the U.S. economy, in particular the labor market and inflation. Lots of measures exist to gauge the labor market. We are seeing federal tax withholding, which we track, continuing to grow at a healthy pace in August. Federal tax withholding tends to track economywide wages and salaries (see chart below), and wages and salaries more loosely track overall employment. We estimate that federal tax withholding–the combined amount of income and payroll taxes withheld from workers’ paychecks and remitted by employers as soon as the next day to the U.S. Treasury Department–grew by 6.8 percent in August compared to the amount from August of a year ago, very close to the growth of 6.4 percent in July and 6.9 percent in June (both compared to the same month of the prior year). That recent range is close to the growth observed over most of the past two years. We will see on Friday of this week (yes, tomorrow) what the important employment report shows for August, as released by the Bureau of Labor Statistics in the Department of Labor.
