Fed interest rate cuts hinge on looming inflation report

The Federal Reserve’s twin goals for the U.S. economy of low unemployment and low inflation are usually in sync.

The Fed could, however, face situations where its goals pull and push monetary policy in opposite directions in a slowing but growing economy.

This is one of those times.

The Fed is confronting one of its most difficult tests in years as slowing job growth and rising unemployment collide with inflation fueled by President Donald Trump’s aggressive tariff policy.

The independent central bank will decide in just a few days whether to cut interest rates to shore up the weakening jobs market and support economic growth or continue to hold rates steady to ward off higher than targeted inflation.

This move could affect interest rates on credit cards and student loans on Main Street, plus stock market trades on Wall Street.

But first there’s one more release of government data before the Federal Open Market Committee votes on Sept. 17: the Consumer Price Index.

The Fed’s dual mandate guides monetary policy

• The Federal Reserve has a dual mandate from Congress to execute monetary policy that ensures maximum employment and price stability.
• The independent central bank can raise interest rates to slow inflation, which can cause unemployment.
• Or it can cut rates to boost job growth, but that can cause prices to rise.
• The Fed has held rates steady since December 2024 at 4.25% to 4.50% in a “wait-and-see” approach for the impact of tariffs on the supply chain.
• Fed Chair Jerome Powell recently signaled an interest rate cut could be warranted in the near future amid a “shifting balance of risks.”

The White House is tired of waiting

Trump is demanding an immediate and whopping 3% cut to the benchmark Federal Funds Rate to:

• Boost the stagnant housing market.
• Reduce the interest rate on the national debt.
• Prevent the economy from falling into stagnation or recession.

The president has ratcheted up his personal and professional criticism of Powell and the FOMC for failing to lower rates this year.

Cooling August labor numbers raises rate cut expectations

• Job growth slowed to a crawl in August, and the unemployment rate rose to its highest level since late 2021, the Bureau of Labor Statistics reported Sept. 5.
• The unemployment rate increased to 4.3%, as expected, from 4.2% in July.
• Nonfarm-payroll jobs increased by only 22,000 in August far below the estimate of 75,000.
• Private-sector hiring slowed sharply in August, with just 54,000 jobs added, according to the ADP Employment Report.
• Initial unemployment benefits rose to the highest since June, increasing by 8,000 to 237,000 in the week ended Aug. 30, the Labor Department reported.

"The warning bell that rang in the labor market a month ago just got louder," said Olu Sonola, head of U.S. economic research at Fitch Ratings, told Reuters. "The Fed is likely to prioritize labor market stability over its inflation mandate, even as inflation drifts further from the 2% target."

The inflation side of the mandate now in scope

The Fed prefers the Personal Consumption Expenditures (PCE) index over the CPI because it captures a broader range of spending. 

• The PCE adjusts more effectively for changes in consumer behavior.
• In July 2025, headline PCE inflation held steady at 2.6% year-over-year.
• Core PCE, which strips out food and energy, rose to 2.9%, its highest since February.
• By comparison, the latest CPI showed inflation running at 3.2%.
• The next CPI release is Sept. 10.

What’s ahead at the Fed

The widely respected CME Group FedWatch Tool reports a 90% chance of a .25% rate cut later this month.

Some market analysts also predict a .25% cut in December, followed by four more, adding up to a 3.0 to 3.25% funds rate by the end of 2026.

"The wide miss on the August employment report builds the potential for a Fed rate cut, but the question is still whether we get one or more before the end of the year,” Chris Versace, the veteran trader and TheStreet Pro lead portfolio manager, said.

“Next week's August [Consumer Price Index and Producer Price Index] figures could help clear up that picture."