Next week’s Fed meeting is almost certain to deliver what markets have been waiting for: a rate with odds seen now at about 95%. Here’s why.
Investors are closely watching how President Trump's tariffs are filtering into consumer prices. In August, prices for goods and services moved higher than expected as companies passed on higher costs, while jobless claims accelerated.
The latest inflation report showed consumer prices at an annual rate of 2.9% in August, up from the previous month’s 2.7%. According to the Bureau of Labor Statistics, this marked the fourth consecutive monthly rise.
Core CPI, which excludes volatile energy and food prices and is perceived as a clear inflation gauge, held steady at 3.1%, which aligns with Wall Street's expectations.
On a monthly basis, the headline CPI rose 0.4%, accelerating from 0.2% in July. Core CPI increased by 0.3%, matching the prior month's rate.
Despite this modest uptick in inflation, Wall Street remains confident that the Federal Reserve will cut interest rates at next week’s meeting. While the Fed is experiencing intense pressure from Donald Trump, officials appear more concerned by signs that the U.S. jobs market is weakening.
Fed Chair Jerome Powell has acknowledged that tariffs are pushing prices up, but said that the slowdown in the jobs market has become the Fed’s central focus.
Recent labor market revisions reinforced those concerns. Employment gains for May and June were revised down by a combined 258,000. In addition, the June figures were revised again last week, showing net job losses for the first time since December 2020. The unemployment rate ticked up to 4.3%, the highest since 2021.
Markets reacted swiftly: the U.S. dollar index slipped after the data release, with EUR/USD climbing above $1.17 and erasing prior losses after the European Central Bank decided to keep interest rates unchanged.
Equity futures also moved higher. Nasdaq futures pumped the most, up 0.3%. S&P 500 futures were up 0.25% and Dow Jones futures advanced 0.2%.
For now, traders appear encouraged, and momentum may be strong enough to extend the S&P 500’s record-setting rally to a third straight day.
