Markets have convinced themselves they’ll get a September interest rate cut. Now they’re eyeing a double reduction

But this isn’t the only pressure Jerome Powell and the Federal Open Market Committee (FOMC) are under: Analysts and politicians are also getting their orders in for how much of a cut they want to see.

Despite the fact that the FOMC has reiterated time and again that its decision is based on economic data and anecdotal evidence only, that hasn’t stopped high-profile individuals from having their say.

Treasury Secretary Scott Bessent, for example, told Fox Business’s Kudlow yesterday that the “fantastic” CPI numbers have led him to ask whether we should get a 50 basis-point rate cut in September.

His reasoning is that the Fed should have cut in June and July, had they known the fuller picture about the labor market. Earlier this month the Bureau of Labor Statistics shocked markets when it revealed payrolls grew by just 73,000 last month, well below forecasts for about 100,000. Meanwhile, May’s tally was cut down from 144,000 to 19,000, and June’s total was slashed from 147,000 to just 14,000, meaning the average gain over the past three months is now only 35,000.

The motivation for a larger cut would be to “make up” for the missed opportunities earlier this summer, Bessent added.

It’s unsurprising that Bessent would lead the charge for a larger reduction. He is backing the stance of the Oval Office that Powell and the Fed have been too slow to normalize monetary policy, and are hampering economic activity as a result. Yesterday President Trump reiterated this call, writing on Truth Social: “It has been proven, that even at this late stage, tariffs have not caused Inflation, or any other problems for America, other than massive amounts of CASH pouring into our Treasury’s coffers.”

While analysts aren’t sold on the idea of a larger reduction to the base rate, they’re not ruling it out either. Speaking ahead of the release of the CPI data yesterday, State Street Global’s Tim Graf told Reuters that while markets are unlikely to fully bake in a reduction of two clicks, investors may begin to hedge toward the possibility as we get closer to the September meeting. They won’t price “that it will be delivered,” he said, “but that the probability is above, say, 0%.”

The tone of the FOMC is also likely to turn more dovish, after two dissenters already split from the pack in July over the committee’s decision to keep the base rate at 4.25% to 4.5%. And their stance is likely to be further boosted by the appointment at the next meeting of Trump nominee Stephen Miran—widely seen by the market as a dove who will push for rates to lower.

But with the FOMC missing a meeting this month—instead heading for the Jackson Hole Economic Policy Symposium—the committee will have more time, and crucial data, to help inform their decision.

Investors should take notice, too, wrote Deutsche Bank’s Jim Reid in a note to clients this morning, instead of treating a September cut as a foregone conclusion. “The main takeaway was for the Federal Reserve, as investors dialed up the likelihood of a 25 bps rate cut in September,” Reid wrote. “It was the same story for the coming months as well, with 105 bps of cuts priced in by the June 2026 meeting at the close, up +4.4 bps on the previous day.”

He added: “In their CPI recap, Deutsche Bank’s U.S. economists think that the release isn’t likely to move Fed officials from their priors in either direction, and that the upcoming labor market data will be more important with respect to near-term cuts.”

“With overall inflation likely under control amid a slowing economy, our base case remains that the Fed will resume rate cuts at the September meeting and continue cutting for a total of 100 bps,” added Mark Haefele, CIO at UBS Global Wealth Management, in a note to clients this morning. “We like medium-duration quality bonds for investors seeking portfolio income amid falling cash rates.”

Core inflation snag

Markets are perhaps willingly overlooking the small niggle of core inflation notching up to 3.1% in yesterday’s release. This reading (as opposed to headline inflation of 2.7%) may arguably hold more weight with the Fed as it doesn’t include volatile assets like food prices, and sits well ahead of the 2% target.

For this very reason, a portion of analysts are convinced that contrary to the majority opinion, the July data has lowered the likelihood of a cut.

“It seems fair to say that the Fed could be considering a move in September, but I don’t think a cut at that meeting is as much of a given as market pricing is implying,” wrote J.P. Morgan Wealth Management’s head of investment strategy, Elyse Ausenbaugh, following the report’s release. “We will get plenty of data between now and then that could give the Fed pause one more time before taking action in the fourth quarter.”

“Do not expect a September rate cut,” was the message from Larry Tentarelli, chief technical strategist for Blue Chip Daily Trend Report. Tentarelli wrote: “The July payrolls report missed forecasts and the unemployment rate ticked higher—signs of a potentially weakening labor market. Meanwhile, 12-month CPI came in above the prior month for June and now for July.  

“While one data point does not make a trend, two consecutive months of higher 12-month inflation will make it difficult for the Fed to justify a rate cut at their September 17 meeting. We remain bullish on the S&P 500 index into year-end, but we do not expect a September rate cut unless the jobs market drops off drastically over the next 45 days.”

Jobs data released in September will hold more sway over the Fed’s decision, added Bill Adams, chief economist for Comerica Bank, who said the July CPI report made it less likely for the Fed to cut in September because inflation came from “sticky service prices rather than tariff-affected goods.”