As the Federal Reserve prepares for its upcoming meeting next week, the latest inflation and labor market data suggest that the central bank is likely to reduce interest rates. This anticipated move comes amid growing concerns that the U.S. labor market is losing momentum, even as inflation remains a factor in the Fed’s decision-making.
Inflation in the U.S. rose more than economists had expected in August, with the Consumer Price Index increasing by 2.9% year-on-year, the highest inflation rate since early 2025. Monthly inflation rose 0.4%, slightly surpassing forecasts, while the core inflation rate, which excludes volatile categories such as food and energy, edged up 0.3%. This data confirms that inflation pressure has not yet fully eased but remains moderate enough for policymakers to consider adjusting rates downward soon.
On the labor market front, the most recent report showed considerable slowing in job growth. Employers added just 22,000 jobs in August, a sharp drop from the 73,000 gained in July. The unemployment rate ticked up to 4.3%, a four-year high, reflecting a cooling labor market after years of steady gains. Job growth has been concentrated primarily in healthcare and social assistance, which saw an increase of nearly 47,000 jobs, while other sectors collectively lost close to 25,000 positions. This uneven spread points to stagnation in many industries sensitive to economic uncertainty.Â
The Federal Reserve’s current target range for the federal funds rate stands at 4.25% to 4.50%, a level maintained since December 2024. The Fed has held rates steady for several months amid mixed signals from the economy. The slowing job growth combined with persistent but manageable inflation provides the Fed with a rationale to move forward with rate cuts, possibly as soon as the meeting scheduled for September 16-17. Market expectations show a strong likelihood of a 25 basis point cut, while a larger reduction of 50 basis points appears less probable.Â
Chair Jerome Powell and the Federal Open Market Committee have been cautious all year, especially given uncertainties triggered by tariffs and global economic factors. While President Trump has publicly urged significant rate cuts, the Fed has so far resisted precipitous moves to avoid igniting inflationary pressures again. However, the recent labor market softness combined with inflation creeping above the 3% mark signals the Fed may begin easing monetary policy to support economic growth without overshooting on inflation.Â
This expected rate cut would mark a shift from the Fed’s prior stance of holding rates to contain inflation and balance economic stability. The move aims to ease borrowing costs and encourage spending at a moment when hiring is slowing down and industries outside healthcare face challenges. However, the Fed will likely continue its patient approach, closely monitoring upcoming data before deciding on further rate adjustments.
In summary, the labor market’s loss of momentum alongside moderate inflation increases has created an economic environment where the Federal Reserve appears ready to lower interest rates for the first time in months. The decision expected next week will be closely watched for clues on the Fed’s future path and its balancing act between controlling inflation and supporting growth.
