Fed Holds Rates Steady as PCE Inflation Rises to 2.8% Dampening Cut Hopes

The Federal Reserve is likely to maintain its current interest rate stance into September, with recent Personal Consumption Expenditures (PCE) data reinforcing the central bank’s cautious approach. The PCE index, the Fed’s preferred inflation metric, rose 2.6% year-on-year in June, surpassing expectations of 2.5%, while core PCE, which excludes volatile food and energy prices, climbed to 2.8%—also above the 2.7% forecast [1]. Both the monthly PCE and core PCE figures were 0.3%, signaling persistent inflationary pressures that are not cooling as quickly as anticipated [2].

The strong inflation readings have significantly dampened market expectations for a rate cut at the upcoming September FOMC meeting. According to the CME FedWatch tool, the probability of a 25-basis-point reduction now stands at 39.2%, down sharply from 63.7% the previous day [1]. Conversely, the likelihood of the Fed holding rates steady has climbed to 60.8%, which would extend the pause in rate cuts to six consecutive meetings [1]. This aligns with the Fed’s recent decision at the July meeting to keep the federal funds rate within its current range of 4.25%-4.50% [2].

Fed Chair Jerome Powell has emphasized that inflationary pressures—particularly those tied to tariffs from the Trump-era trade policies—remain a key concern. Although the full impact of these policies may not yet be fully realized, they contribute to the Fed’s reluctance to ease monetary policy prematurely [1]. Meanwhile, Donald Trump has criticized Powell, accusing him of economic mismanagement and calling for a more aggressive approach to monetary easing [1].

Market reactions have reflected the shift in expectations, with the dollar index gaining strength as traders reassess the near-term likelihood of rate cuts [4]. Federal funds futures now price in a 40% chance of a September cut and a 36% chance at the next meeting, figures that remain below earlier forecasts [4]. Analysts note that unless future data reveals a significant softening in inflation or labor market conditions, the Fed is unlikely to move toward easing in the near term [3].

Consumer spending, while showing a rebound in June, remains cautious, which the Fed has highlighted as a factor in its policy considerations [3]. The labor market also remains strong, with low unemployment and continued economic expansion in the second quarter, further complicating the Fed’s policy calculus [3].

The Fed’s current stance appears to align with a broader global trend, where central banks are adopting a more measured approach to monetary easing in response to persistent inflation and geopolitical risks [3]. While some policymakers have advocated for rate cuts to support growth, the Fed has opted to continue its data-dependent strategy. Two dissenting votes at the latest FOMC meeting underscore the internal debate within the committee, but the decision to hold rates steady reflects a consensus to prioritize inflation control [2].

As the central bank awaits further economic data, particularly the next core PCE inflation report, the path to rate cuts remains uncertain. For now, the Fed is likely to maintain its current stance, ensuring that any easing is justified by clearer signs of inflation moderation and stable economic conditions [1].

Source: [1]title1.............................(https://www.morningstar.com/news/dow-jones/2025073110343/dow-jones-top-markets-headlines-at-9-am-et-core-pce-inflation-runs-a-touch-hot-dimming-hopes-for-september-rate-cut-us)

[2]title2.............................(https://wolfstreet.com/2025/07/30/the-fed-torn-by-two-governor-dissents-sticks-to-wait-and-see-keeps-rates-at-4-25-4-50-frets-about-uncertainty/)

[3]title3.............................(https://www.fox16.com/news/business/ap-us-economy-rebounds-a-surprisingly-strong-3-in-the-second-quarter/)

[4]title4.............................(https://www.barchart.com/story/news/33782467/dollar-gains-as-us-economic-strength-dampens-fed-rate-cut-expectations)