A fresh reading from the Federal Reserve’s preferred inflation gauge showed prices are still sticky, but the report isn’t likely to take the central bank off its course for more rate cuts in 2025 — especially if the job market continues to remain soft.
The Personal Consumption Expenditures (PCE) index on a “core” basis, which excludes volatile food and energy prices, showed inflation rose 2.9% for the month of August. That was in line with expectations, holding the same level as in July.
“Inflation may not be reversing, but it’s not reaccelerating,” said Ellen Zentner, chief economic strategist for Morgan Stanley Wealth Management.
“The economy is percolating but not overheating,” she added. “Barring a major upside surprise from next week’s jobs report, the Fed should remain on course to deliver another rate cut in late October.”
Fed officials last week cut rates for the first time in 2025 and predicted two more cuts for the year, which would mean reductions at meetings in late October and early December. They see inflation rising to 3.1% in 2025 before coming back down to 2.6% next year.
Those figures would leave inflation still above the Fed’s goal of 2%, but many policymakers are now more worried about weakness in the job market than prices. The Fed has a dual mandate to maintain stable prices and maximize employment.
“I think it’s fair that the Fed start a series of a couple of rate cuts, maybe two more for the end of this year, and then to pause to reassess what the economic situation really is,” Principal Asset Management chief global strategist Seema Shah told Yahoo Finance after the PCE release on Friday.
The real determining factor for what the Fed does at its next policy meeting is a new jobs report due out next Friday. But that could get delayed if there is a government shutdown next week, creating new uncertainties for policymakers.
U.S. Federal Reserve Chair Jerome Powell. (Photo by Hu Yousong/Xinhua via Getty Images) ·Xinhua News Agency via Getty Images
The path of inflation remains uncertain as President Trump’s tariffs work their way through the US economy.
Fed Chair Jerome Powell said this week that tariffs will likely result in a one-time price increase, but that may not be all at once and may be spread across several quarters, thus showing up as somewhat higher inflation during that period.
He stressed that the Fed will make sure that this one-time increase in prices does not become an ongoing inflation problem, which is important for inflation expectations.
But other members of the Fed are more concerned about the risk of inflation becoming more long-lasting. Chicago Fed president Austan Goolsbee cautioned Thursday against assuming inflation is transitory and noted that the US is getting stagflationary direction shocks.
“If we are in this environment where inflation’s been above the 2% target for almost five years in a row now, and it’s going the wrong way, just counting on the inflation to be transitory makes me uneasy,” said Goolsbee.
Another policymaker, Kansas City Fed president Jeff Schmid, said Thursday that inflation remains “too high while the labor market, though cooling, still remains largely in balance. I view the current stance of policy as only slightly restrictive, which I think is the right place to be.”
Richmond Fed president Tom Barkin said Friday that high productivity could offset upward inflation pressures, even though inflation remains above 2% as businesses are inclined to still pass on the costs of tariffs to consumers.
Barkin noted that productivity growth seems to be improving “significantly,” pointing to employers that faced a shortage of workers following the pandemic having invested in automation and new processes to reduce their dependence on labor.
Tom Barkin, president and CEO of the Federal Reserve Bank of Richmond. (Photo by BASTIEN INZAURRALDE/AFP via Getty Images) ·BASTIEN INZAURRALDE via Getty Images
Deployment of new technologies like artificial intelligence is having an impact, particularly on coding, call centers, and entry-level employees, he also said. And businesses reluctant to hire are finding ways to get work done with less.
“Higher productivity growth helps offset margin pressure in a way that limits inflation — as we saw in the second quarter, when earnings grew despite higher costs and limited price passthrough,” said Barkin.
Other Fed officials are pushing aggressively for faster rate cuts, arguing that the central bank needs to get ahead of any further labor problems.
Fed governor Michelle Bowman said this week the recent data already put the central bank at “serious risk” of being behind the curve in addressing the job market.
She has penciled in a total of three rate cuts this year, but notes that if job growth remains soft, the Fed will need to cut rates faster and in larger increments.
The dilemma of whether the Fed should pay more attention to inflation or employment is clearly not going away anytime soon.
“If businesses remain in a ‘low hire – low fire’ mode, the job market should remain stable enough to keep the economy out of recession, but at the same time, add frustrations for the Fed interested in easing rates without stoking greater inflation pressure,” said Jeffrey Roach, chief economist for LPL Financial.
