Rising Jobless Claims Push Fed Toward Faster Rate Cuts

The U.S. Consumer Price Index (CPI) rose 2.9% year-over-year in August, up from July’s 2.7% increase, as reported by the Bureau of Labor Statistics. This slight uptick in inflation, while in line with economists’ forecasts, has added complexity to the Federal Reserve’s path toward interest rate reductions. On a monthly basis, prices climbed 0.4%, outpacing the 0.3% expected by analysts, with gasoline and food costs contributing to the rise.

Core inflation, which excludes volatile food and energy components, remained stable at 3.1% year-over-year in August, matching the previous month’s reading. The core index also showed a 0.3% monthly increase, reflecting the strongest rise in six months. The data has reinforced expectations that the Fed will implement a 25-basis-point rate cut at its upcoming policy meeting, according to the CME FedWatch tool. However, recent developments in the labor market have further influenced market sentiment.

New data revealed that initial jobless claims rose to 263,000 in the week ending August 31, the highest level in nearly four years. This marked an increase from the prior week’s revised figure of 236,000 and exceeded expectations of 235,000. The rising jobless claims have shifted attention away from the CPI report, with analysts suggesting that the labor market slowdown could accelerate the pace of rate cuts. Seema Shah, chief global strategist at Principal Asset Management, noted that the jobless claims data could add urgency to the Fed’s decision, potentially leading to a series of rate cuts.

Following the release of the CPI and jobless claims data, traders priced in an 88% chance of a 25-basis-point rate cut and an 11% probability of a 50-basis-point reduction in the upcoming meeting. By year-end, markets still anticipate a total of 75 basis points in rate cuts. While the Fed’s chair has not yet signaled the magnitude of the cuts, the possibility of a larger-than-expected reduction has gained traction in recent days, especially after preliminary revisions showed a significant downward adjustment in employment figures for the year through March 2025.

Analysts remain cautious, noting that while the inflation data suggests a modestly hotter than expected reading, it is unlikely to derail the Fed’s rate-cutting trajectory. The broader economic slowdown, particularly in the labor market, has increased the likelihood of a more aggressive stance from the central bank. Shah emphasized that despite the inflationary pressures, the Fed’s focus is now more on supporting employment and economic stability, which may lead to a more aggressive sequence of rate cuts in the coming months.