Will the Fed Shift Priorities as Inflation Fears Wane?

The latest minutes from the Federal Reserve's Federal Open Market Committee (FOMC) highlight a policy approach that continues to prioritize inflation control over direct job market support, despite signs of a weakening labor market. Most economists surveyed by Reuters anticipate a rate cut in September, marking the first such reduction this year, followed by at least one more cut by year-end. This projection aligns with broader economic concerns, including rising inflation and downward revisions in hiring figures that suggest a softening labor market [1].

According to the survey, 61% of economists expect the Fed to lower the benchmark interest rate by 25 basis points in September, bringing it to a range of 4.00%-4.25%. This would be a shift from the previous stance of maintaining stable rates. Despite this anticipated shift, some analysts caution that the market’s confidence in a September rate cut might be overblown, as the FOMC appears cautious about interpreting recent labor market conditions [1]. Barclays economists emphasized that the central question is whether the Fed should ease policy due to a shift in risk balance from inflation to full employment [1].

ING's analysis of the EUR/USD rate forecasts further supports the expectation of Fed rate cuts, with the firm projecting 25 basis point reductions in September, October, and December, followed by a more aggressive 50 basis point cut in 2026. The firm's outlook suggests that the Fed is likely to continue a dovish stance, especially with inflation from tariffs expected to be mild and short-lived. The anticipated rate differentials between the U.S. and other major economies are expected to play a pivotal role in the EUR/USD exchange rate, with ING forecasting a move toward 1.20 by the end of the year [2].

The inflation forecasts remain largely unchanged from previous months, with the average expected inflation rate remaining above the Fed's 2% target through at least 2027. This suggests a continued emphasis on inflationary pressures rather than immediate support for employment. Economists also anticipate that the unemployment rate will remain around or slightly above the current level of 4.2% in the coming years, indicating that the recent downward revisions to hiring figures have yet to fully influence expectations [1].

While there are growing concerns about the potential impact of tariffs on inflation and the job market, the majority of economists do not foresee significant erosion of the Fed’s independence during the remainder of Chair Jerome Powell's term. This suggests a level of institutional confidence in the Fed's ability to maintain its independence despite external pressures. The focus remains on balancing inflation control with support for employment, with many analysts expecting the Fed to retain flexibility in its policy approach [1].

The upcoming Jackson Hole Symposium and the subsequent inflation and jobs data will be critical in shaping the Fed's decision-making process. Analysts at Morgan Stanley emphasize that the Fed may prefer to maintain optionality, which would allow it to respond to potential weak August employment data or further inflationary pressures [1]. The continued uncertainty surrounding economic data and political pressures makes it challenging for economists to make definitive predictions, but the overall consensus is that the Fed will remain cautious in its approach to rate cuts.

Source: [1] US Fed to cut rates in September and once more this year say most economists (https://www.reuters.com/business/us-fed-cut-rates-september-once-more-this-year-say-most-economists-2025-08-15/) [2] EUR/USD: Our latest views | articles (https://think.ing.com/articles/eur-usd-our-latest-views/)