Slowing Inflation Sets Stage For Fed’s September Cut

Source Credit : Portfolio Prints

Recent Inflation Trends: Headline vs. Core

• Headline CPI Deceleration

  In July 2025, U.S. headline inflation rose 0.2% month-over-month—down from June’s 0.3%—translating to a 2.7% annual increase. This moderation has eased a key hurdle for the Federal Reserve.



• Core Inflation Still Elevated

  Meanwhile, core CPI (which strips out volatile food and energy prices) climbed 0.3% in July and now stands at 3.1% year-over-year—the fastest increase since February. The divergence between headline and core inflation—particularly due to a 2.2% decline in gasoline prices—offers a nuanced backdrop for policymakers.

Market Reaction: Betting on September

• Odds Tilt Toward a Cut

  Following the July inflation report, markets surged, with the S&P 500, Dow Jones, and Nasdaq hitting all-time highs amid elevated expectations for a September rate cut—traders estimate over a 90% probability.



• Forecasts from Analysts

  Nomura, for example, predicts a 25-basis-point cut in September, with further cuts likely in December 2025 and March 2026. Still, a 50-basis-point cut is deemed unlikely because, while inflation is easing, the labor market remains relatively stable.

Fed Officials Signal Shift Toward Easing

• Vocal Advocates for Rate Reductions

  San Francisco Fed President Mary Daly recently stated that slowing inflation and a looser labor market may necessitate rate cuts in the coming months, even raising the possibility of more than two reductions in 2025.
  
  Minneapolis Fed Chief Neel Kashkari echoed this sentiment, citing cooling consumer spending and rising concerns over economic deceleration as grounds for a possible September cut.



• July Meeting Marked by Dissent

  At the July 30 Fed meeting, the central bank kept rates steady at 4.25%–4.50%, though two governors—Michelle Bowman and Christopher Waller—dissented in favor of cuts. Powell emphasized that future decisions hinge on incoming data, especially inflation trends linked to tariffs.

Why Slowing Inflation Matters

• Headline Cooling Buoys Sentiment, Core Still a Constraint

  While headline inflation is trending favorably, the persistent 3.1% core rate serves as a reminder that underlying price pressures—especially in services and tariff-sensitive goods—are still sticky.



• Tariff Effects Remain in Focus

  Analysts caution that tariff-related inflation may yet re-emerge if supply-chain costs are passed through more aggressively or energy prices rebound.



• Labor Market Deceleration Advocates Caution

  With employment growth slowing, the Fed faces a dual mandate trade-off—between curbing inflation and supporting job markets—making the decision to cut rates delicate.

Setting the Stage for September

Putting it all together:

• Disinflation in headline CPI has lowered the bar for justification of easing monetary policy.


• Core inflation’s stubbornness, however, tempers urgency—especially amid tariff uncertainty.


• Signs of labor market fragility, combined with elevated cut expectations, are nudging the Fed toward action.


• Fed officials are positioning for flexibility—ready to act as data solidifies the slowdown narrative.


• For now, a 25-basis-point cut at the September meeting—while data-dependent—has become the base case.

Bottom Line

Slowing headline inflation, weak job growth, and elevated expectations from both markets and some Fed officials are creating a compelling case for a rate cut in September 2025. Still, core inflation and tariff-related risks remain wildcards, limiting the Fed’s window for aggressive easing. How the Fed balances its dual mandate will focus heavily on upcoming data—particularly the next jobs and inflation reports—before making a move.