All eyes are on the Federal Reserve as it convenes for its September meeting this week, with economists and investors alike betting that Wednesday will bring the first in a series of cuts amid a softening jobs market.
Thirty-day federal funds futures are fully pricing in the possibility of three rate cuts this year. Meanwhile, a survey of economists by Bloomberg News reported that the median respondent expects two cuts by the end of 2025, while more than 40 percent of the economists surveyed anticipate three reductions.
Interestingly, the survey also found that 90 percent of respondents expect Fed officials to change their post-meeting statement on September 17 to place a greater emphasis on labor market risks. That echoes a key prediction our latest Asset Allocation Focus: that the weakening labor market could compel the Fed to prioritize employment over inflation control, even if that risks heightened future inflation.
For Fed Chair Jerome Powell, the task of balancing the U.S. central bank’s dual mandate of maximum employment and price stability has become more delicate than ever as a slew of recent economic data has tipped the scales of risk toward the labor market.
The U.S. economy added 911,000 fewer jobs over the 12 months ending in March than initially reported the Bureau of Labor Statistics (), according to data released by the agency on Tuesday, suggesting that job growth was already on the decline before President Donald Trump’s aggressive tariffs on imports. The BLS stated that it had likely overreported the total number of jobs added by the U.S. since March 2024 by nearly 1 million, amounting to around a 0.6 percent reduction—the largest estimated revision in history. That brings the average monthly gain to about 73,000 jobs per month instead of the 149,000 initially reported.
Meanwhile, the latest report shows 85,979 job cuts in August, up 39 percent from the 62,075 announced in July. Excluding the COVID-19 pandemic, the layoffs were the worst recorded since 2008 during the Great Recession. Additionally, initial jobless claims surged by 27,000 to 263,000 in the week ended September 4, the highest level since October 2021 as we’ll discuss in greater detail to follow.
Tugging on the other side of the Fed’s mandate, recent data pointing to stubborn has dampened investor hopes that inflation could be on the decline after government reports reflected a cooling trend in consumer and producer prices earlier in 2025. The consumer price inflation index posted a seasonally adjusted 0.4 percent gain in August, the largest increase since January. Core inflation, a favored gauge by the Fed that excludes more volatile food and energy costs, rose 0.34 percent, pushing the year-over-year inflation rate to 3.1 percent—still well above the Fed’s 2 percent target. Despite evidence of sticky inflation, we and other market participants expect the Fed to cut rates this week given its focus on potential labor market weakness. Fed funds futures are also pricing in a nearly 100% chance of rate cuts in October and December, suggesting that many investors still expect a dovish Fed in the coming months despite sticky inflation.
Going forward, however, we expect that Powell will avoid making any hard and fast decisions as the threat of stagflation—the combination of high inflation, slow economic growth and rising unemployment—weighs on the Fed’s every monetary policy move. The recent spike in both consumer prices and serves as a classic indicator of a potential stagflationary environment, making the Fed’s tightrope of risk more precarious than ever.
This delicate balancing act will also test divisions among Fed officials. The Senate Banking Committee recently approved President Donald Trump’s nomination of Stephen Miran to fill an empty seat on the Fed’s Board of Governors. Currently chair of the White House Council of Economic Advisers, Miran’s confirmation is expected in the full Senate soon, and he could potentially participate in the mid-September rate-setting meeting. Separately, a federal court has blocked the Trump administration’s attempt to fire Lisa Cook from the Fed’s board before the upcoming meetings. The administration has appealed the ruling, and the case could potentially reach the Supreme Court. In the meantime, however, Cook is likely to participate in the upcoming Fed meeting.
While present-day inflation has been considerably less severe in magnitude and duration than that of the “Great Inflation” period of 1966 to 1982, history still holds valuable lessons. Unanchored inflation expectations in the 1970s led to a “wage–price spiral,” where higher prices fueled demands for higher wages, which in turn caused inflation to spike. Furthermore, the misguided belief that the U.S. central bank could tolerate higher inflation for lower ended up backfiring as elevated inflation created the economic conditions for high unemployment to thrive. Looking ahead, the Fed must continue to prioritize price stability, even as its gaze shifts to the labor market for the time being, while continuing to manage inflation expectations.
Ultimately, the Fed’s strategy will need to be flexible and highly responsive to incoming data as it navigates these complex and at times contradictory economic signals of slowing job growth, rising unemployment and persistent inflation.
Wall Street Wrap
Key inflation measures rise: This month’s Consumer Price Index () data from the Bureau of Labor Statistics (BLS) showed prices rising 0.4 percent in August compared to 0.2 percent in July, with the all-items index rising 2.9 percent over the past 12 months. Core inflation, a measure favored by the Fed that excludes volatile food and energy costs, rose by 0.3 percent in August and 3.1 percent on a year-over-year basis. Goods inflation rose 0.3 percent after the prior two months each showed an increase of 0.2 percent. This pushes the year-over-year pace to 1.5 percent. We note that goods inflation now checks in at 1.5 percent year over year, a level that has not been seen since the period spanning June 2011 to May 2012 (excluding the COVID-impacted months of December 2020 to May 2023). Most importantly, goods have functioned as a source of disinflation for much of the past 25 years, refraining from exceeding the current 1.5 percent year-over-year level from April 1996 all the way to August 2009.
The bigger risk is that inflation spreads to the larger services sector, where price increases tend to be more persistent and difficult to reverse. Recent CPI data shows services inflation increasing by 0.34 percent in August. Supercore services inflation, an inflation gauge developed by the Fed that tracks labor-intensive services such as health care and transportation while excluding food, energy and housing, rose by 0.33 percent in August and is up 3.2 percent year over year. These figures indicate a trend of rising service costs, which could solidify inflationary pressures across the broader economy.
Consumer sentiment dips again: Preliminary data from the University of Michigan on Friday shows that fell for a second straight month to its lowest level since May. The overall index fell 2.8 points, or about 5 percent, to 55.4—missing the 58.0 that economists had forecast as fears over tariffs and inflation have fueled increasing pessimism among consumers. The worsening sentiment was particularly apparent among lower- to middle-income respondents.
The survey indicates lingering concerns about inflation, with year-ahead inflation expectations holding steady since August at 4.8 percent. Long-run inflation expectations (five to 10 years) moved up for the second straight month to 3.9 percent in September from 3.5 percent in August, highlighting the risk that consumers may expect inflation to become a persistent feature of the U.S. economy. The survey also suggests that consumers are continuing to fret over the labor market, with 65 percent of respondents reporting that they expect an increase in unemployment in the coming year, up from 63 percent last month and nearing the recent high of 66 percent in March. This marks the eighth consecutive month when more than half of the respondents reported fearing rising unemployment, a condition that at least historically has coincided with economic contractions.
“Consumers continue to note multiple vulnerabilities in the economy, with rising risks to business conditions, labor markets and inflation,” Joanne Hsu, the director of the Surveys of Consumers, said in a statement. “Likewise, consumers perceive risks to their pocketbooks as well; current and expected personal finances both eased about 8 percent this month. Trade policy remains highly salient to consumers, with about 60 percent of consumers providing unprompted comments about tariffs during interviews, little changed from last month.”
Small business optimism improves among labor concerns: Optimism among small businesses improved in August according to the latest data from the National Federation of Independent Business (NFIB), rising 0.5 points to 100.8, above the 52-year average of 98. This represented a smaller increase from July, however, when optimism increased 1.7 points to 100.3. The percentage of business owners expecting better business conditions fell two points from July to a net seasonally adjusted 34 percent, a reversal from the previous month’s 14-point rise to 36 percent in July. The Uncertainty Index fell by four points to 93, marking a reversal from July’s eight-point increase to 97 amid a decrease in uncertainty about financing expectations and planned capital expenditures.
“Optimism increased slightly in August with more owners reporting stronger sales expectations and improved earnings,” said NFIB Chief Economist Bill Dunkelberg. “While owners have cited an improvement in overall business health, labor quality remained the top issue on Main Street.”
On-the-ground business conditions improved for the second consecutive month in August. When asked to rate the health of their businesses, 14 percent said excellent (up one point from July), 54 percent said good (up 2 points), 27 percent said fair (down 4 points) and 4 percent said poor (unchanged).
Despite improved sales expectations, current sales continued to be a challenge with a net negative 9 percent reporting higher sales over the past three months, down from a net negative 5 percent in July. In signs of a slowing labor market, only 32 percent of owners reported job openings they can’t fill, the lowest since July 2020. 21 percent of respondents reported labor quality as the top problem faced by their business—the same percentage as last month—as the job market continues to be the highest-ranked obstacle for small business owners.
In a positive inflation signal, those reporting raising prices in the last three months fell to 21 percent down from 24 percent and the lowest level since October 2024, while those planning prices hikes in the next three months fell to 26 percent, down from 28 percent and the recent high of 32 percent in June.
Jobless claims surge: The number of new jobless claims rose to 263,000 for the week ended September 6, the highest level since October 2021. The surge in claims adds to signals of a softening labor market, a trend that aligns with a slowing pace of job growth and a rising unemployment rate of 4.3 percent in August. However, it’s worth nothing that this data stems from the four-day week following Labor Day, which could be impacting seasonal adjustments as a result of weekly volatility in the underlying unadjusted data. The four-week moving average of jobless claims (which accounts for weekly volatility) rose to 240.5 from 230 the week prior—higher than the recent low of 221 in August but still lower than all four readings in June which reached a high of 245.75. We’ll be watching carefully to see whether jobless claims keep climbing in the coming weeks.
Continuing claims—the number of people who received benefits after their initial week of aid— in at 1.94 million in the week ended August 30, remaining steady from the week previous. Continuing claims lag initial claims data by a week. This remains well above the 1.845 million level in the same week last year. This trend continues to suggest that layoffs remain low for now, but weak hiring is keeping those who become unemployed out of work longer and the recent spike in initial claims forecasts potential job cuts on the horizon.
The Week Ahead
Wednesday: On the second day of the Fed’s September meeting, the members of the Federal Open Market Committee () will conclude their deliberations and vote on the federal funds rate. Analysts widely expect the Fed to cut interest rates by a quarter of a percentage point, moving the target range to between 4 and 4.25 percent. The Fed will also release its much-awaited dot plot, which predicts future interest rate paths based on each FOMC member’s current view of economic conditions, among other key insights into the Fed’s views on GDP, inflation, unemployment and more.
Elsewhere, the U.S. Census Bureau will release data on new residential construction in August. This data, along with the Homebuilders Index released on Tuesday, will provide insight into the home construction market.
Thursday: The Conference Board’s latest Leading Economic Index Survey for August will be out by midmorning. Last month’s reading showed a modest decline of 0.1 percent after falling 0.3 percent in June. We’ll watch the data to see if it shows another slight improvement or if weakening persists.
Initial and will be out before the market opens. We’ll be watching for more insight into the health of the labor market, particularly when it comes to continued claims.