The Setup
The Federal Reserve has spent the past two years walking a tightrope: cooling inflation without breaking the economy. From pandemic-era lows of 0%–0.25%, rates climbed to 5.25%–5.50% in 2023. Since then, the Fed has eased slightly, but at 4.25%–4.50%, policy is still restrictive.
Here’s the challenge: inflation isn’t falling fast enough.
The Numbers
June PCE inflation: 2.6% YoY, still above the Fed’s 2% target.
Market pricing: Investors see an 85% chance of a 25 bp cut in September — reflecting the Fed’s history of matching expectations after careful signaling.
Employment: Softer labor data adds pressure to ease, even if inflation hasn’t fully cooled.
Looking ahead, the October and December meetings remain uncertain. If inflation stays sticky this fall, the Fed may pause cuts — risking stagflation: slow growth paired with persistent price pressures.
Why It Matters
Stagflation risk: History shows how difficult it is to fix. In the 1970s, the Fed fought inflation with aggressive hikes, triggering a recession in the early 1980s.
Political pressure: President Trump has already criticized Chair Powell, saying “every sign is pointing to a major rate cut.” Political commentary could make the Fed’s independence more complicated.
Credibility test: If the Fed cuts preemptively and inflation doesn’t follow through, markets may question whether 2% is still a realistic target.
Takeaway
As of this month, 70% of global investors expect stagflation in the year ahead. If inflation refuses to cool, they may be right.
Powell’s speech at Jackson Hole on August 22 could offer the clearest hint yet of how the Fed plans to navigate the months ahead — and whether the balancing act can hold.
— Lauren
Editor, American Ledger