Fed still on track for more interest rate cuts as US core inflation holds at 2.9%

Core inflation stayed stuck at 2.9% in August, according to the Federal Reserve’s go-to forecast tool. The data, released Friday by the Commerce Department, makes it clear the Fed is still heading toward another interest rate cut, likely within the next few months.

The personal consumption expenditures (PCE) price index went up 0.3% last month, pushing the overall yearly inflation rate to 2.7%. That’s a small bump from July’s 2.6%, while the core rate, which drops food and energy, barely moved, rising 0.2% monthly and holding at 2.9% for the year.

Every number lined up exactly with what Wall Street was expecting, based on the Dow Jones forecast.

Fed sticks to rate-cut path despite stubborn inflation

Even with inflation still above the Fed’s 2% goal, officials aren’t switching gears. Last week, policymakers signaled they’re expecting two more quarter-point rate cuts by the end of the year. The first one already happened.

The Federal Open Market Committee approved it just last week, dropping the federal funds rate to a new target range of 4% to 4.25%. Markets are already pricing in another move for October, but a December cut is still up in the air.

As inflation refuses to cool off fully, spending and income data are also showing signs of strength. Personal income jumped 0.4% in August, while consumer spending rose even faster at 0.6%. Both of those beat estimates by 0.1 percentage point, showing that Americans are still throwing cash around—even with higher prices.

The data also puts a spotlight back on Donald Trump’s tariffs. Despite earlier fears, they haven’t done much to push up prices. A lot of firms loaded up on goods before the tariffs kicked in, while others just ate the cost. It worked. Consumer prices haven’t spiked the way people thought they would.

Fed Chair Jerome Powell and other officials aren’t stressing over the tariffs much. “They’re likely just a one-time bump in prices,” Powell said. But some people at the Fed still aren’t buying that. A few are worried there’s not much space left to keep cutting rates without real risk.

Still, the consumer seems fine. Even with tariffs in place, people are spending like normal. Rising incomes are helping. That’s likely giving the Fed some cover to stay on its current course.

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