Fed Rate-Cutting Pressure Intensifies as Chicago Business Activity Slumps

The Federal Reserve’s next move is increasingly shaped by a troubling narrative: regional economic weakness is intensifying pressure for rate cuts. The Chicago Fed National Activity Index (CFNAI), a barometer of U.S. economic health, fell to –0.19 in July 2025, marking the fourth consecutive month of activity below its historical trend [1]. This decline, driven by deteriorating production and employment indicators, underscores a broader slowdown that could force the Fed to act preemptively in Q3 2025.

The CFNAI’s breakdown reveals a fragile economic landscape. Production-related indicators—a key driver of growth—contributed –0.10 to the index in July, reversing from a modest positive contribution in June [2]. Employment-related metrics also worsened, with a –0.06 drag, while sales, orders, and inventories showed slight improvement [3]. These trends align with a synchronized slowdown in labor supply and demand, as highlighted by Fed Chair Jerome Powell, who warned of a “curious kind of balance” in the labor market [4].

The Fed’s internal debates have grown more contentious. At the July FOMC meeting, Governor Michelle Bowman and others pushed for a 25-basis-point cut, arguing that delaying action risks exacerbating the labor market’s fragility [5]. Governor Christopher Waller echoed this, citing inflation’s proximity to the 2% target and a slowing economy as justification for easing policy [6]. Market expectations now price in a near 90% chance of a September rate cut, reflecting growing confidence that the Fed will respond to regional weakness [7].

Yet the Fed faces a delicate balancing act. While inflation remains above target (core PCE at 2.9% year-over-year), the risk of a wage-price spiral looms if workers demand higher pay amid rising prices [8]. Meanwhile, financial conditions have remained accommodative despite geopolitical volatility, but credit markets—particularly in commercial real estate—remain vulnerable to tighter policy [9]. The Fed’s minutes from July reveal a divided committee: some officials advocate a wait-and-see approach, while others favor proactive easing [10].

For investors, the CFNAI’s trajectory offers a critical signal. A sustained negative reading, coupled with regional economic data, could catalyze a September rate cut. However, the Fed’s dual mandate—tackling inflation while preserving employment—means policy will hinge on incoming data. If labor market deterioration accelerates, the case for aggressive easing will strengthen.

Source:
[1] Chicago Fed National Activity Index: Current Data [https://www.chicagofed.org/research/data/cfnai/current-data]
[2] Chicago Fed National Activity Index Slips in July [https://tradingeconomics.com/united-states/chicago-fed-national-activity-index/news/480215]
[3] Chicago Fed’s National Activity Index in July Suggests Growth Slowdown [https://www.haver.com/articles/chicago-fed-s-national-activity-index-in-july-suggests-growth-slowdown]
[4] Monetary Policy and the Fed’s Framework Review [https://www.federalreserve.gov/newsevents/speech/powell20250822a.htm]
[5] Fed’s Bowman Makes Case for 3 Interest Rate Cuts in 2025 After Voting Against July Hold [https://finance.yahoo.com/news/feds-bowman-makes-case-for-3-interest-rate-cuts-in-2025-after-voting-against-july-hold-161618517.html]
[6] Federal Reserve Policy Analysis Q3 2025 - 7/30/25 (FOMC Meeting) [https://www.linkedin.com/pulse/federal-reserve-policy-analysis-q3-2025-73025-fomc-meeting-amjad-mod6f]
[7] Fed Rate Cut? Not So Fast [https://www.morganstanley.com/insights/articles/fed-rate-cut-september-2025-forecast]
[8] The Fed - Monetary Policy: Minutes of the Federal Open Market Committee [https://www.federalreserve.gov/monetarypolicy/fomcminutes20250730.htm]
[9] Q3 2025 Credit Research Outlook Resilience amid Risk [https://www.ssga.com/us/en/institutional/insights/q3-2025-credit-research-outlook]
[10] Federal Reserve’s Powell Balances Inflation, Labor Market [https://www.usbank.com/investing/financial-perspectives/market-news/federal-reserve-interest-rate.html]