The U.S. Federal Reserve is expected to cut interest rates by 25 basis points in September amid signs of cooling inflation in July and early signs of weakness in the labor market.
Data released Tuesday showed the Consumer Price Index rose 0.2 percent last month, down from a 0.3 percent increase in June and largely matching economists’ expectations, while annual inflation came in just below forecasts at 2.7 percent. Both figures were just shy of Dow Jones estimates of 0.2 percent and 2.8 percent, respectively.
Three reductions expected by March 2026
Nomura expects three 25-basis-point reductions, one in September, December 2025 and March 2026. However, it noted that a 50-basis-point cut next month is unlikely as the labor market is slowing, but there are a few signs of stress, and broader financial conditions remain easy.
The firm also reduced its July core Personal Consumption Expenditures (PCE) estimate to 0.243 percent from 0.325 percent, pointing to weakness in categories like prescription drugs and software.
Markets are currently pricing in an average of 60.4 basis points in Federal Reserve interest rate cuts by year-end, with a 94.2 percent chance of a 25-basis-point cut in September, according to data from LSEG and the CME Group’s FedWatch tool.
J.P. Morgan now also anticipates the Federal Reserve will lower interest rates by 25 basis points at its September meeting, pointing to labor market weakness and uncertainty surrounding President Donald Trump’s latest Fed nomination.
The bank had previously expected a single 25-basis-point cut in December but said that risks now favor an earlier move, followed by three additional quarter-point reductions before the Fed pauses.
Read: Bank of England cuts interest rate to 4 percent, stresses caution for inflation control
Labor market slows
Increased expectations for a Federal Reserve interest rate cut in September were triggered by a dramatic decline in U.S. labor market growth last month. The July payroll report showed employers added just 73,000 jobs, well below forecasts, while the unemployment rate rose to 4.2 percent, according to the Bureau of Labor Statistics.
Previous months’ figures were also revised sharply lower, with May’s job gains reduced to 19,000 from 144,000 and June’s lowered to just 14,000 from the initially reported 147,000.
With inflation also remaining above the Fed’s 2 percent target, the latest jobs data is expected to increase pressure on the Federal Reserve to lower interest rates.
In its last meeting, the Fed kept its benchmark rate unchanged, with Chair Jerome Powell saying policymakers want more evidence on how tariffs are influencing inflation before making any adjustments.
