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Fed Walks Tightrope as Inflation Persists and Job Growth Slows
10 Sep
Summary
- Fed prepares to cut interest rates despite high inflation
- Consumers expect inflation to remain elevated in the coming year
- Bondholders fear Fed may prioritize employment over price stability
In September 2025, the Federal Reserve is set to cut interest rates for the first time since Donald Trump's return to the White House, despite high inflation that remains a concern. While President Trump has repeatedly urged the Fed to lower rates, the central bank's decision is driven by slowing job creation and its dual mandate to foster full employment and price stability.
The challenge is that these two goals are now in conflict. Even as the Fed prepares to cut rates to support the labor market, inflation remains above its 2% target and shows signs of becoming entrenched. This raises the risk that cheaper money could allow inflation to spiral out of control, destabilizing markets.
Consumers themselves expect inflation to run at 4.8% over the coming year and 3.5% over the long run, according to the University of Michigan's survey. Meanwhile, bondholders are jittery, with nearly half of fund managers surveyed by Bank of America citing either "inflation prevents Fed cuts" or a "disorderly rise in bond yields" as the biggest threat to markets.
The Fed faces a delicate balancing act as it navigates these conflicting pressures. Its decisions in the coming months will have significant implications for the economy and financial markets.
