The Fed's Dual Mandate and the Inevitability of a September Rate Cut

The Federal Reserve’s dual mandate—achieving maximum employment and stable prices—has long been a balancing act. But in 2025, the scales are tipping. The July 2025 Personal Consumption Expenditures (PCE) price index, the Fed’s preferred inflation gauge, rose to 2.9% year-over-year, matching forecasts and edging higher from June’s 2.8% [1]. While this remains above the 2% target, the data’s alignment with expectations has reduced the urgency to tighten further, freeing the Fed to pivot toward its employment mandate.

The PCE report underscores a critical shift in inflation dynamics. Services prices, which account for nearly two-thirds of consumer spending, surged 3.6% annually, driven by healthcare, housing, and education costs [1]. Meanwhile, goods prices rose modestly (0.5%), and energy prices fell 2.7%, tempering overall inflation. This divergence suggests that core inflation is becoming increasingly entrenched in the services sector, a trend the Fed has long struggled to manage without harming labor markets. With goods inflation moderating and energy prices dragging down the all-items PCE (2.6%), the Fed now has more flexibility to address employment risks [1].

The labor market, however, is showing troubling signs. Unemployment remains low at 4.2%, but job growth has slowed to a crawl. The supply of workers is shrinking as higher tariffs and demographic shifts reduce labor force participation, while demand for workers is softening in sectors like manufacturing and retail [4]. Federal Reserve Chair Jerome Powell has acknowledged this “unusual situation,” noting that the risks to employment are now “tilted to the downside” [4]. A September rate cut, likely 0.25 percentage points, is increasingly seen as a necessary tool to prevent a self-fulfilling slowdown in hiring and spending [3].

Market pricing reflects this pivot. Investors now assign an 84% probability to a September cut, up sharply from 60% in early August [3]. The August jobs report, due September 5, will be the final arbiter, but even a modest slowdown in payrolls could cement the Fed’s decision. The key insight here is that the Fed is no longer waiting for inflation to fall to 2% before acting. Instead, it is preemptively addressing employment risks, a departure from its post-pandemic playbook [4].

This shift is not without controversy. Critics argue that cutting rates while inflation remains above target risks prolonging high prices. Yet the Fed’s dual mandate requires balancing both objectives, and the July PCE data—by confirming inflation’s stability—has removed one leg of the argument for restraint. With services inflation showing no sign of abating and labor market cracks widening, the Fed’s September move is not just likely—it is inevitable.

**Source:[1] Core inflation rose to 2.9% in July, highest since February, [https://www.cnbc.com/2025/08/29/pce-inflation-report-july-2025.html][2] Personal Consumption Expenditures Price Index, [https://www.bea.gov/data/personal-consumption-expenditures-price-index][3] Powell Signals Possible Fed Rate Cut in September - Money, [https://money.com/fed-rate-cut-september-experts-predict/][4] Fed Chair Powell Keeps September Rate Cut On The Table, [https://www.investopedia.com/fed-chair-powell-keeps-september-rate-cut-on-the-table-11795858]