Markets Push for Cuts, but Inflation Won’t Budge | S2 E070 | 08-29-25
Inflation continues to move in the wrong direction, complicating the Federal Reserve’s September meeting decision despite market expectations for an interest rate cut. The latest core PCE data—the Fed’s preferred inflation gauge—rose to 2.9% year-over-year in July, up from 2.8% in June, signaling persistent price pressures throughout the economy.
Breaking down the numbers reveals concerning trends beneath the surface. While headline PCE increased a modest 0.2% month-over-month as expected, the “super core” inflation measure (excluding both housing and energy) jumped dramatically to 3.3% annually, which is almost double June’s rate. This acceleration in underlying inflation appears concentrated in the service sector, even as goods prices have shown some moderation.
The disconnect between economic data and market sentiment creates a fascinating dynamic heading into the FOMC’s September meeting. Despite today’s inflation warning signs, financial markets are still pricing in nearly a 90% probability of a rate cut. This puts the Federal Reserve in a precarious position. How do they address potential concerns in the labor market without reigniting inflation that clearly hasn’t been fully tamed?
The Fed must now walk an incredibly fine line, potentially easing monetary policy while simultaneously managing inflation expectations. As we head into Labor Day weekend, this balancing act represents one of the most significant challenges facing policymakers in the current economic cycle. What approach do you think the Fed should take?
