Fed Rate Cut Outlook Amid Sticky Inflation and Labor Market Signals

Conflicting Data Puzzles the Fed

Last week, weak labor market data overshadowed sticky inflation figures, keeping investor expectations for a Federal Reserve rate cut at this week's policy meeting unchanged. This indicates that the Fed is facing a genuine dilemma: should it focus on persistent inflation or the slowing labor market?

Contradictory Data

Government data released last Thursday showed CPI inflation rising 0.4% in August, an acceleration from July's 0.2% increase. Simultaneously, another report revealed that weekly jobless claims rose to 263,000, the highest level in nearly four years, up from a revised 236,000 the previous week.

Dual Mandate

In deciding whether to change interest rates, the Federal Reserve weighs its dual mandate of achieving full employment and price stability. However, the coexistence of a slowing labor market and persistent high prices puts the Fed in a difficult position.

Expert Analysis

Most Wall Street strategists believe the Fed will face a complex decision in the future given the dynamic of a slowing labor market coinciding with continued high prices. According to economist Claudia Sahm, this is "the worst-case scenario for the Fed." She adds, "They won't cut rates because there's good news on inflation. They'll cut rates because there's bad news on employment." Sahm expects the Fed to cut interest rates by 25 basis points at its two-day meeting this week. However, she notes that inflation is "still too sticky."

Other Perspectives

Other strategists agree with this view, with Collin Martin, a fixed income strategist at Charles Schwab's financial research center, stating, "Inflation remains high. It has been high, and it is now moving in the wrong direction." Joe Brusuelas, chief economist at RSM, suggests that persistent inflation could make the Fed cautious after September. He states, "A rate cut is certain, but I must tell you that the underlying tone of the data does not indicate that we will definitely get three rate cuts before the end of the year."

Market Expectations

As of last Friday, according to the Chicago Mercantile Exchange's "FedWatch" tool, investors priced in a 76% probability of three rate cuts this year, as the labor market shows more and more cracks. Thursday's jobless claims data was the latest evidence highlighting the economic slowdown in the United States. In addition, a comprehensive report of employment revisions released earlier showed that the number of actual jobs in the United States was 911,000 fewer than originally reported from April 2024 to March 2025.

Economic Resilience

Despite this, the slowdown does not appear to be pushing the U.S. economy off a cliff. Lakshman Achuthan, co-founder of the Economic Cycle Research Institute (ECRI), says, "We are not seeing that kind of hard-landing crash in the labor market, and at some point things could get tough... but that hasn't happened yet."

Wall Street Optimism

Despite concerns about the economy and the labor market, Wall Street strategists remain optimistic that artificial intelligence will drive the stock market further into a bull market through 2026. Last week, Oracle Corp. (ORCL) shocked investors with strong AI backlogs, highlighting the strength of the technology sector. Ulrike Hoffmann-Burchardi, global head of equities at UBS Global Wealth Management, says, "Given the strong momentum in tech earnings and the impending Fed rate cut, we don't think high valuations are a reason to avoid diversifying exposure to the sector." She adds: "More broadly, we believe the U.S. stock market has further upside potential, and our target for the S&P 500 is 6600 points by the end of 2025, and 6800 points by the end of June 2026."