The Federal Reserve held interest rates steady at its July policy meeting, with most officials indicating they want to see more progress in bringing inflation down before moving to ease monetary policy. A key inflation report coming Friday morning is expected to show that price growth ticked up again in July, which could complicate the case for a rate cut in September.
The personal consumption expenditures price index, or PCE, the Fed’s preferred inflation gauge, likely rose by 0.2% last month and 2.6% year to year, about even with June’s rate of change.
Core PCE, which excludes volatile food and energy prices, is forecast to rise 0.3% in July and 2.9% for the year, the biggest increase since February, according to economists surveyed by FactSet.
July’s producer prices also climbed at the fastest pace since early 2022, pointing to tariff-driven cost pressures that could work their way further into consumer prices. The White House’s most recent round of levies took effect this month, meaning their full impact hasn’t yet registered in consumer inflation readings.
Inflation is picking up, said Seema Shah, chief global strategist at Principal Asset Management. “While [the last] inflation report wasn’t alarmingly strong, underlying signals point to building price pressures amid higher trade tariffs,” she said. “Business surveys increasingly reflect rising cost dynamics, and producer price data suggest that inflation concerns could intensify in the months ahead.”
Still, Fed Chair Jerome Powell used his Jackson Hole speech on Aug. 22 to signal that the central bank is leaning toward easing policy at its September meeting.
“It is reasonable to expect the FOMC [Federal Open Market Committee] to cut interest rates by [a quarter of a percentage point] at the Fed meeting in September,” said Brian Levitt, global market strategist at Invesco. “There is little reason for the Fed to be restrictive with the labor market cooling and inflation expectations in the bond market contained.”
Levitt added that investors should distinguish between tariff-related price shocks and an inflation spiral. “The experience with tariffs in 2018 suggests that tariffs should be viewed as a price shock rather than the beginning of an inflation spiral,” he said.
The FOMC is scheduled to meet again on Sept. 16-17.
Powell’s dovish tone drove stocks to record highs, and unless Friday’s PCE delivers a negative surprise, that optimism could persist.
Friday’s PCE report could also show whether Powell has the cover he needs to cut the federal-funds rate, currently in a target range of 4.25%-4.50%, or whether sticky inflation once again forces the Fed to hold off.
Politics adds another complication to investors’ calculations. President Donald Trump says he has fired Fed governor Lisa Cook, escalating controversy over the central bank’s independence just as it faces one of its most consequential policy decisions in months. Cook, who voted in July to hold rates steady, has sued the administration and says she will remain in place.