Fed remains on track for rate cuts despite stubborn inflation

In a recent analysis of the U.S. Federal Reserve's preferred inflation indicator, it is evident that prices remain sluggish. Nevertheless, this report is unlikely to deter the central bank from targeting further interest rate cuts for 2025, especially if the labor market remains weak. The Personal Consumption Expenditures (PCE) Index excluding food and energy prices recorded an inflation rate of 2.9% for August, which met expectations and remained at the same level as the previous month. Ellen Zentner, Chief Strategist for Morgan Stanley Wealth Management, analyzes: "Although inflation is not declining, it is also not accelerating again. The economy is developing but not overheating." Last week, Fed officials cut rates for 2025 for the first time and forecast two more cuts for the year, which would mean reductions in late October and early December. Inflation could rise to 3.1% in 2025 before falling back to 2.6% the following year. These figures are still above the Fed's 2% target, but many policymakers are increasingly concerned about the weakness in the labor market. The decisive factor for the Fed's next decision is a new labor market report. However, there could be delays if there is a government shutdown next week. Fed Chairman Jerome Powell pointed out that President Trump's tariffs could lead to a one-time price increase that could extend over several quarters. Other Fed members are concerned about the risk of persistent inflation. Austan Goolsbee, President of the Chicago Fed, warned against considering inflation as temporary. Additionally, there is an emphasis on rising productivity, which could alleviate inflationary pressures. Some Fed officials are pushing for quicker rate cuts, including Governor Michelle Bowman, who foresees a total of three rate cuts this year. The debate over whether the Fed should focus more on inflation or employment remains ongoing.