The long-awaited resumption in the Fed’s interest rate cuts occurred, as the central bank weighed the risk associated with a decelerating labor market and accelerating inflation and determined that the job market was the bigger risk to the overall economy.
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The central bank reduced short term rates by a quarter of a percentage point (0.25 percent), putting the Fed funds rate at a range of 4.25-4.5%.
It was just a year ago when the Fed cut rates after the pandemic-induced inflationary surge. They cut two more times in October and December 2024, by 0.25% each, but then paused the campaign, due to two developments: the uncertainty associated with President Donald Trump’s tariffs and new immigration initiatives. Fed officials wanted to wait and see the economic impact of these policies before acting further.
The combination put the Fed in a dicey situation, as it attempted to balance the risk of each side of its so-called “dual mandate,” which Fed Chair Jerome Powell described as “fostering as strong a labor market as possible for the benefit of all Americans,” while seeking “to achieve a 2% inflation rate over time.” Recent reports suggest that each side of that mandate has encountered headwinds.
The labor market has not only slowed down over the past four months but was also not as strong as initially reported between April 2024 and March 2025. This is evidenced in the Bureau of Labor Statistics’ (BLS) Preliminary Annual revision to its data. (The final estimate will be released in February 2026). The BLS said there were 911,000 fewer jobs than originally reported, which was the largest preliminary revision on record, dating back to 2000. That means that average monthly job growth for the period went from 147,000 to 71,000.
Concurrent to the weakening job market, inflation has started to edge higher. The Consumer Price Index (CPI) showed that overall prices increased by 2.9% from a year ago, the fastest rate since January, and core CPI, which strips out the volatile food and energy components, was up 3.1% annually, the strongest reading since February.
Diane Swonk, Chief Economist at KPMG, noted that “some tariffs made their way into food prices. Food at home soared 0.5%, the hottest monthly increase since the height of pandemic inflation in June 2022.” And bad news for coffee lovers: — prices surged by 3.6% in August alone, the fastest monthly pace since April 2011, and are up almost 21% from a year ago, “as the full effects of the 50% tariffs levied on Brazil last month work their way onto store shelves.”
Swonk notes that “typically, tariffs represent a one-time bump in price levels,” which is how the Fed likely justified a rate cut despite the uptick in prices. But she also notes that the Fed is sensitive to the pain associated with “the blistering bout of inflation post-pandemic,” which caused many Americans to believe that “the economy was in a recession, even as job gains remained robust and unemployment fell.” That feeling was due to the fact that once people spent down their excess pandemic savings, they were faced with prices rising much faster than their wages.
Negativity has crept back into the conversation. Consumer sentiment fell to a four-month low, as fears over higher inflation and labor market weakness weighed on households.
That said, people have been saying that they are worried for a while, but they have not yet pulled back dramatically on their spending, which has kept the economy growing. In the words of Jerome Powell, we will all need to be “data dependent” before assuming what happens next.
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Jill Schlesinger, CFP, is a CBS News business analyst. A former options trader and CIO of an investment advisory firm, she welcomes comments and questions at [email protected]. Check her website at www.jillonmoney.com.
