(NewsNation) — With inflation accelerating and the job market faltering, the Federal Reserve faces a potential lose-lose scenario as it prepares to cut interest rates next week.
Consumer prices rose 2.9% in August from a year earlier, the Labor Department said Thursday, the fastest annual pace since January. That’s well above the Fed’s 2% target, but a weakening job market has boxed policymakers into a difficult corner.
Keep rates too high for too long, and more Americans could lose their jobs. Cut too soon and elevated inflation may linger, with the full impact of President Donald Trump’s tariffs still unclear.
“The Federal Reserve is in a difficult situation as the new data this morning show signs that its inflation and full employment mandates are both moving in the wrong direction,” Ryan Sweet, chief U.S. economist at Oxford Economics, said in a statement.
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For now, the labor market looks like the bigger worry, and Fed policymakers are expected to cut rates next week — their first such move since Dec. 2024.
Last week’s jobs report showed that U.S. employers added just 22,000 jobs last month, well below economists’ forecast of 80,000 and July’s gain of 79,000. The unemployment rate also ticked up to 4.3%, its highest level since 2021.
One rate cut from the Fed would only have a modest effect on borrowing costs, but it’s expected to be the first of several, underscoring a broader shift toward supporting the labor market. The risk is that such moves will keep inflation higher for longer.
“There are no good options for the Fed given the set of circumstances we’re facing,” Harvard economist Jason Furman wrote on X Thursday.
How likely is a Fed rate cut next week?
CME’s FedWatch tool shows futures traders pricing in a 100% chance of a September rate cut, with a 93% probability of a quarter-point move and 7% for a half-point.
On Kalshi, a U.S.-based prediction market platform, traders see an 85% chance of a quarter-point cut, 10% odds of a larger move and only 4% odds of no change.
Perhaps more importantly, markets are pricing in additional Fed cuts in both October and December.
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If that happens, consumers could see relief in the form of lower mortgage rates, cheaper auto loans and improved credit card APRs — all of which remain elevated.
At 6.35%, the average 30-year mortgage rate is at an 11-month low, down from 6.75% in mid-July, according to Freddie Mac. The decline reflects growing expectations of a Fed rate cut next week.
But cheaper loans may offer little to celebrate if they coincide with sticky inflation and a deteriorating job market.
A separate government report Thursday showed that the number of Americans filing for unemployment benefits rose to 263,000 last week, the highest level in nearly four years.
Stubborn inflation and a worsening labor market are troubling enough on their own, but together, they could spell a nightmare scenario.
“What [Fed officials] fear is the combination of both: When prices are rising, employment is faltering, and policymakers are forced to take a side. The worst of both worlds,” Bankrate analyst Sarah Foster wrote Thursday.
