Inflation Stalls, Jobs Crack — and Powell’s Running Out of Time

Today’s long-delayed batch of economic data landed with the energy of a late UPS delivery—overdue, imperfect, but still critical for determining the Fed’s next move. After more than six weeks of distorted reporting conditions caused by the 43-day government shutdown, investors finally got fresh reads on wholesale inflation, retail spending, employment signals, and housing trends. The immediate market response was clear: CME Fed Fund Futures now price in an 83% probability of a rate cut on Dec. 10. But just as importantly, the tone of the debate within the Federal Reserve is shifting toward what many traders are calling a hawkish rate cut—an easing move paired with a stiff verbal warning that the Fed is nearly done.

Let’s start with inflation. September PPI came in largely in-line with expectations, with headline wholesale prices up 0.3% month-over-month and 2.7% year-over-year. Core PPI ex-food & energy posted just a 0.1% monthly increase—cooler than August’s 0.3%. While not a decisive victory against inflation, the report showed continued softening in the underlying price impulse at the producer level. However—this is where nuance matters—the components feeding into the core PCE (the Fed’s preferred inflation gauge) were a touch hotter than expected. Capital Economics’ Thomas Ryan warned that these internal price pressures could push core PCE to +0.3% for September, up from +0.2% in August.

The jump in input costs, especially energy (+3.5% MoM), complicates the picture. The Fed will have to ask: is this temporary volatility from energy markets or a signal of re-accelerating cost pressures? That uncertainty, of course, is the Fed’s natural habitat.

Retail Sales offered another dimension to the policy puzzle. Spending rose 0.2% in September, below estimates for 0.4%, and significantly slower than August’s 0.6%. Stripping out vehicles, gas, and volatile components, control-group retail sales actually fell 0.1%. Discretionary categories—electronics, appliances, sporting goods, apparel—declined. Heather Long of Navy Federal Credit Union captured the consumer psychology well: “American consumers are in value-hunting mode… being extra choosy with where they spend their discretionary dollars.”

Retailers have been saying the same thing for weeks. Best Buy, Walmart, Home Depot, Target—each has pointed to a consumer that is still spending, but with a high sensitivity to price and discounting. And as Home Depot’s CEO Ted Decker commented: higher rates and mortgage stagnation are weighing on household-related spending, delaying upgrade cycles and remodeling.

Then there’s the jobs side of the mandate—the area the Fed increasingly views as the more fragile leg of the dual-policy stool. ADP's private-sector trend data showed companies losing a weekly average of 13,500 jobs over the past month—an acceleration from 2,500 in the prior period. This is not a collapse—yet—but it suggests that the cooling trend in labor demand is deepening beneath official BLS readings.

Here’s the kicker: the official BLS jobs data that the Fed relies on isn’t even available because of the shutdown. This means Powell and the FOMC are steering monetary policy with one eye closed. As the WSJ reported in their coverage—explicitly citing the internal Fed turmoil—Powell is presiding over “a divided committee, missing data, and a whiff of stagflation.” That piece from the Wall Street Journal laid out the two strategic paths Powell is weighing: either cut now and signal a high bar for additional easing or hold until January and try to restore internal agreement. The WSJ noted that Powell’s leadership could be decisive here—more so than in any recent policy cycle.

This brings us to the core question: what is the Fed solving for? Inflation or jobs?

Until recently, the Fed was clearly prioritizing inflation. But the needle has shifted. Inflation is no longer accelerating. It’s frustratingly sticky—but not spiraling. Jobs, on the other hand, are showing consistent deterioration. That’s why New York Fed President John Williams—one of Powell’s closest internal allies—said last week there is still “room for a further adjustment in the near term.” Williams also noted it was “equally important” not to create undue risk to employment while restoring price stability.

Translation: better to cut now and pause, than delay and regret.

And this is exactly where markets are landing. An 83% probability of a December cut is essentially the market saying: barring a shock, the Fed is cutting.

But the type of cut matters enormously. A dovish cut would suggest more are coming. A hawkish cut says: this one is strategic, not the start of a cutting cycle. Powell could pair a December reduction with a statement that effectively reads:

“We’re closer to neutral, further cuts unlikely unless conditions worsen.”

That would regain control over the narrative—and quiet the public disagreement among Fed officials.

Lastly, these data and policy dynamics feed into the growth debate. Atlanta Fed GDPNow says Q3 real GDP was 4.2%. The New York Fed’s Nowcast says just 2.3%. The difference illustrates how the economic signal-to-noise ratio is degraded by delayed and incomplete data.

Which brings us to the bottom line. The Fed is approaching December 9–10 knowing three things:

Inflation progress has stalled—but not worsened.

Employment softening is real and accelerating.

Consumer spending is still alive—but cautious and concentrated

With that backdrop, the most likely outcome is the “cut-then-hold” model described by the WSJ: a single quarter-point cut in December, paired with messaging that further easing requires demonstrably weaker conditions.

For markets, this means volatility—yes—but not chaos. A hawkish rate cut would preserve the Fed’s inflation-fighter credibility while gently cushioning the labor market ahead of 2026. In other words: the adults are still driving the car, even if the headlights are flickering.