Fed Signals Potential 175-Basis-Point Easing Amid Rising Inflation and Weakening Retail Sales

The Federal Reserve is showing growing openness to monetary easing as conflicting economic signals emerge, with traders pricing in a high likelihood of a rate cut at the central bank’s upcoming September 16–17 meeting. San Francisco Fed President Mary Daly has hinted that policy easing could begin next month, even as inflationary pressures persist. Her remarks suggest that the Fed may implement two rate cuts by year-end to counter slowing economic momentum and stabilize inflation [1].

Despite the Fed’s recent decision to hold its policy rate within the 4.25–4.50% range for the fifth consecutive month since December, the economic landscape has shifted. U.S. retail sales rose 0.5% in July, driven by promotional efforts from major retailers, but core retail spending has shown signs of moderation amid a weakening labor market and rising prices [8]. Consumer inflation expectations have climbed to 4.9% in August from 4.5% the prior month, further complicating the Fed’s outlook [8].

The central bank is caught in a delicate balancing act—weighing the need to ease monetary policy against the ongoing inflationary pressures fueled by elevated tariffs and supply chain constraints. Import prices rose 0.4% in July, particularly for consumer goods, which has fed through to higher retail prices and reinforced concerns that businesses are shifting cost burdens onto consumers [8]. This dynamic contradicts earlier forecasts that import prices would decline under higher tariffs, as market share competition was expected to drive down prices [8]. St. Louis Fed President Alberto Musalem acknowledged that inflation remains near 3%, short of the Fed’s long-term target, and that tariffs are contributing to this trend [12].

Market reactions to the potential easing have been mixed. Equities have rallied on expectations of lower borrowing costs, while the U.S. dollar has weakened against a basket of currencies [4]. Meanwhile, Treasury yields have edged higher, reflecting increased demand for safe-haven assets amid uncertainty over the pace of rate cuts [8]. Energy stocks have also shown volatility, serving as a proxy for broader inflation expectations [1]. The financial sector, which has historically benefited from higher interest rates, now faces the risk of margin compression as the Fed signals a potential 175-basis-point easing by mid-2025 [1].

Fed Governor Austan Goolsbee has emphasized that the central bank is not yet ready to act without greater assurance that inflation is on a sustainable path toward the 2% target [5]. This cautious approach highlights the complexity of the current economic environment, where slowing demand and more accommodative financial conditions coexist with persistent inflationary pressures.

With the next major policy meeting on the horizon and the Jackson Hole symposium approaching, investors will be closely watching for clues from Fed Chair Jerome Powell. Economists are not ruling out an additional rate cut before year-end, but the path forward remains uncertain as the Fed navigates a fragile economic landscape [6].

Source:

[1] title: Federal Reserve Policy Easing and Its Impact on Equity Valuations Assessing the Sustainability of the Bull Market

https://www.ainvest.com/news/federal-reserve-policy-easing-impact-equity-valuations-assessing-sustainability-bull-market-2508/

[4] title: US dollar stabilizes near multi-week lows on Fed rate cut bets

https://www.economies.com/forex/news/us-dollar-stabilizes-near-multi-week-lows-on-fed-rate-cut-bets-47104

[5] title: Fed's Goolsbee: Want More Assurance on Inflation to Cut

https://m.fastbull.com/news-detail/feds-goolsbee-want-more-assurance-on-inflation-to-4339949_0

[6] title: Week Ahead for FX, Bonds: Fed's Powell Comments at Jackson Hole in Focus

https://www.morningstar.com/news/dow-jones/202508154666/week-ahead-for-fx-bonds-feds-powell-comments-at-jackson-hole-in-focus

[8] title: US retail sales rise in July; softening job market poses risk to consumer spending

https://fixedincome.fidelity.com/ftgw/fi/FINewsArticle?id=202508151321RTRSNEWSCOMBINED_L1N3U70DJ_1

[12] title: Fed's Musalem: Tariffs are feeding through to inflation

https://www.mitrade.com/au/insights/news/live-news/article-6-1040238-20250814