MNI FED WATCH: Easing Resumes As Jobs, Inflation Data Worsen

The Federal Reserve is expected to lower benchmark interest rates by 25 bps Wednesday and signal more cautious easing as both labor market and inflation data worsen. 

Fed Chair Jerome Powell hinted strongly at the annual Jackson Hole conference that cuts are coming, as what appeared to be solid labor market conditions all year now look more precarious. But with inflation also rising, many Fed officials are hesitant to cut too quickly, raising the risk of an "ongoing inflation problems," as Powell put it. (See: MNI POLICY: Fed Takes Measured Approach To Post-September Cuts)

"We’re more likely to see pauses and skips in the coming meetings to evaluate the situation because the two mandated objectives are more now in conflict with each other," former Atlanta Fed President Dennis Lockhart told MNI. (See: MNI INTERVIEW: Powell Won't Signal String Of Fed Cuts-Lockhart) 

The expected rate reduction comes after months of trade uncertainty and nonstop pressure from President Donald Trump to drop rates. 

DIVISIONS

White House economist Stephen Miran, set to be confirmed as governor just before the FOMC meeting, could dissent in favor of a 50 bp cut, as might Fed governors Chris Waller and Michelle Bowman, who both dissented against the July decision to hold rates steady in favor of a quarter point cut. 

However, at least one regional Fed president hawkish on inflation could also dissent in favor of a hold, creating a three-way split in votes for the first time since 2019. 

Traders have priced in a steeper easing path as the labor market data weakened over the past month, with a cut at every remaining meeting in the year and two or more in 2026. The Fed's quarterly Summary of Economic Projections will offer insights into whether market expectations match those of policymakers.

PRECARIOUS BALANCE

Hiring slowed to an average of just 29,000 in three months ending August and the unemployment rate rose to 4.3%, the highest since the pandemic. Benchmark annual revisions to the establishment survey then took away 911,000 in job gains in the year through March, leaving an average of just 70,000 jobs added during that period. 

"The risk to the employment outlook look bigger now," former director of the Fed Board's division of monetary affairs William English told MNI. "It leans in the direction of easing policy further, faster than maybe the Fed had been inclined to." (See: MNI INTERVIEW: Fed To Cut Faster After Weaker Jobs - English)

Coupled with reports from consumer-facing firms that customers are pulling back and confidence is falling, Fed officials are on watch for a recessionary turn, Yongseok Shin, a St. Louis Fed research fellow and economist at Washington University in St. Louis, told MNI. (See: MNI INTERVIEW: US Job Market At Potential Pivot Point - Shin)

LONG ROAD

The August inflation reports largely met expectations, showing evidence that tariffs are seeing pass-through to goods prices on top of solid underlying momentum propelled by consumer spending. The Cleveland Fed Inflation Nowcast expects headline and core PCE inflation to have risen to 2.8% and 3.0% in August, from 2.6% and 2.8% in June. 

To some, the relatively muted effects of tariffs on consumer prices so far indicate higher costs have been spread along the supply chain without lasting effects on inflation. (See: MNI INTERVIEW:Low Inflation Ex-Tariffs Backs Fed Cuts-Haslag)

"The more extreme stories about the tariff effects on inflation don't seem to be materializing," former St. Louis Fed President James Bullard and a contender to become the next Fed chair, told MNI. (See: MNI INTERVIEW: Fed To Cut Every Meeting To End Year - Bullard)

But businesses say they still expect to raise prices, and services inflation has stayed persistently strong. The fight against inflation is not yet over. (See: MNI INTERVIEW: Tariff Inflation Impact Broadens- ATL Fed Study and MNI INTERVIEW: Fed Inflation Woes Extend Beyond Tariffs-Lacker)