Signs of slowing inflation and a cooling job market are fueling investor expectations that the Federal Reserve will cut interest rates as soon as September.
The July inflation report, released Tuesday, came in softer than feared, easing concerns about price spikes. Traders quickly recalibrated their bets, with CME Group’s FedWatch tool showing a 94.1% probability of a quarter-point cut next month—up from 85.9% the day before.
The Fed faces a delicate balancing act. Its dual mandate requires keeping inflation in check while fostering maximum employment. Recent data suggests the bigger problem now lies with the job market. Hiring has slowed to a crawl over the past three months, while “core” inflation—stripped of food and energy—remains above the Fed’s 2% target but is no longer accelerating at a dangerous pace.
Lower rates could stimulate borrowing, consumer spending, and business investment, potentially reigniting hiring. But the risk is that easier money could rekindle inflation, especially with President Donald Trump’s tariffs still in place.
This is hardly the Fed’s first swing in policy. In 2020, it slashed rates to near-zero to support the pandemic-hit economy. Then, faced with 40-year-high inflation in 2022, it pushed rates to a two-decade high. Since late 2024, as inflation cooled, the Fed has cautiously trimmed rates, most recently in December, keeping the current target at 4.25% to 4.5%.
Political pressure is mounting. Trump has publicly blasted Fed Chair Jerome Powell—whom he appointed in 2018—accusing him of acting “too late” and even threatening legal action over alleged cost overruns in a Fed building renovation. Powell has maintained that rate decisions must remain insulated from politics, focused solely on economic fundamentals.
The Fed’s next move will hinge on incoming data. Policymakers will see one more round of employment and inflation reports before the September meeting. If August jobs data comes in weak, analysts say the central bank could feel compelled to act sooner than planned.
“Another soft labor market report could force the Fed’s hand,” said Michael Pearce of Oxford Economics. “Right now, inflation is still above target, but jobs are flashing more warning signs.”
For now, markets are betting the Fed will prioritize protecting jobs—even if it means taking a calculated risk with inflation.
