Fed Rate-Cut Path Amid Slightly Rising Inflation

The Federal Reserve faces a delicate balancing act in September 2025 as it weighs the case for a rate cut against persistent inflationary pressures. With the core Consumer Price Index (CPI) at 3.1% year-over-year in July 2025 and the broader CPI at 2.7%, inflation remains stubbornly above the Fed’s 2% target, fueled by tariffs and sticky service-sector costs [1]. Yet, a slowing labor market and mixed economic signals have reignited debates about whether the central bank will prioritize employment over price stability.

Inflation: A Persistent Headache

The latest data underscores inflation’s resilience. Core CPI, which excludes volatile food and energy, rose 0.3% month-over-month in July, the highest gain since January 2025 [1]. Service-sector costs, particularly in shelter and healthcare, continue to drive this trend, while the Cleveland Fed’s nowcast projects core CPI at 3.02% for August 2025 [3]. Meanwhile, producer price inflation (PPI) hit 3.7% annually in July, reflecting supply-side pressures from trade policies [1]. Consumer inflation expectations, at 4.9% according to the University of Michigan, further complicate the Fed’s calculus, as embedded expectations risk self-fulfilling inflation dynamics [2].

The Fed’s Dilemma: Jobs vs. Prices

The labor market, once a pillar of strength, has shown signs of strain. July’s nonfarm payrolls added just 73,000 jobs, far below the 110,000 expected, and downward revisions to May and June data—reducing total gains by 258,000—have raised concerns about a weakening labor market [1]. The unemployment rate, at 4.2%, remains stable, but long-term unemployment has risen, and job growth is concentrated in healthcare and social assistance, with other sectors like manufacturing and construction lagging [5].

Fed Chair Jerome Powell has acknowledged these risks, describing a “curious kind of balance” in the labor market where both supply and demand for workers have slowed [2]. While Powell ruled out political motivations for easing policy, he hinted at a potential rate cut to address labor market fragility. Fed Governor Christopher Waller and San Francisco Fed President Mary Daly have echoed this sentiment, with Waller explicitly stating that cuts are likely over the next 3–6 months [4].

However, not all officials are convinced. Morgan Stanley analysts argue the Fed’s hands may be tied by inflation, with a 50-50 chance of a September cut despite market expectations of 87% [1]. The July FOMC minutes emphasized caution, noting that inflation expectations are rising and that the economic outlook remains “mixed” [3].

Strategic Implications for Investors

The Fed’s September decision will hinge on whether it views the labor market slowdown as a temporary blip or a structural shift. If a rate cut occurs, investors should consider defensive strategies: real assets like gold and REITs could hedge against inflation, while U.S. large-cap quality stocks may benefit from accommodative policy [1]. Conversely, if the Fed prioritizes inflation control, sectors sensitive to higher rates—such as housing and consumer discretionary—could face headwinds.

The path forward remains uncertain. While tariffs and global supply chains may temper inflation in the short term, the risk of entrenched price pressures persists. The Fed’s ability to navigate this tightrope will shape not only monetary policy but also the broader economic trajectory.

**Source:[1] Consumer Price Index Summary - 2025 M07 Results [https://www.bls.gov/news.release/cpi.nr0.htm][2] Powell suggests rate cuts are coming — but not because ... [https://www.cnn.com/business/live-news/fed-powell-jackson-hole][3] The Fed - Monetary Policy: [https://www.federalreserve.gov/monetarypolicy/fomcminutes20250730.htm][4] Fed's Waller sees rate cuts over next 3-6 months, starting in September [https://www.reuters.com/business/finance/feds-waller-sees-rate-cuts-over-next-3-6-months-starting-september-2025-08-28/][5] Employment Situation Summary - 2025 M07 Results [https://www.bls.gov/news.release/empsit.nr0.htm]