Earlier this week, the U.S. Bureau of Labor Statistics released back-to-back August PPI and CPI reports. After July’s PPI surprise spike, August came in unexpectedly soft. Meanwhile, CPI ticked up slightly but was very much in line with expectations. Combined with Jerome Powell’s dovish-leaning comments at Jackson Hole and last Friday’s very weak nonfarm payrolls report, analysts have turned more aggressive in their expectations for the Fed’s rate-cutting path over the next few months.
August PPI and CPI at a Glance
On Thursday, ahead of the U.S. market open, August PPI showed an unexpected drop: down 0.1% month-on-month versus expectations for a 0.3% rise. Year-on-year, PPI grew 2.6%, well below the prior reading and consensus of 3.3%. Core PPI (ex-food and energy) grew 2.8% y/y, missing forecasts of 3.5% and dropping from 3.7% previously. MoM core PPI also slipped 0.1%, compared to expectations for a 0.3% gain.
Source: US Bureau of Labor Statistics
Friday’s CPI report came in exactly where economists expected: headline CPI rose 2.9% y/y (up from 2.7%) and 0.4% m/m (slightly above the 0.3% forecast). Core CPI grew 3.1% y/y and 0.3% m/m, right on target. Big drivers were vehicle prices and shelter costs. Overall, August inflation data was seen as “Goldilocks” — not too hot, not too cold — which helped reassure markets.
Source: US Bureau of Labor Statistics
Markets Now Betting on a “Triple Cut”
Over the past few weeks, rate-cut expectations have shifted dramatically. The turning point was Powell’s Jackson Hole speech, where he warned that the U.S. economy faces “dual risks” from a softening labor market and still-elevated inflation, noting that “the balance of risks is shifting.” Many took this as a sign the Fed is leaning dovish and may cut rates soon. Minutes from the last FOMC meeting already showed more Fed officials focusing on labor-market weakness, suggesting the risk calculus is changing.
The data since then has only reinforced that narrative: August nonfarm payrolls showed just 22,000 jobs added (vs. 75,000 expected), and unemployment climbed to 4.3%. On top of that, the government made a massive revision to prior employment data, cutting 911,000 jobs from the year through March — the biggest downward revision since 2000. That’s basically 76,000 fewer jobs per month than previously reported. Together with softer PPI and on-target CPI, markets now view a September rate cut as all but guaranteed, and have become much more confident about back-to-back cuts after that.
CME FedWatch data shows traders fully pricing in at least a 25-basis-point cut in September, with about a 7.5% chance of a 50-point cut. A month ago, nearly 15% of traders thought the Fed would not cut at all in September, and there were zero bets on a 50-point cut. Looking further out, markets now see a 75%+ chance of three consecutive 25-point cuts at the September, October, and December meetings — up from just 45% a week ago — and even a 6% chance that one of those meetings delivers a 50-point move.
Source: CME FedWatch Tool
Aggressive rate-cut bets have fueled a broad rally: the S&P 500 $S&P 500(.SPX)$ and Nasdaq $NASDAQ(.IXIC)$ are both up around 1.6% this week, the Dow $Dow Jones(.DJI)$ gained 1.5%, and all three indexes hit record highs. Gold $ETFS Physical Gold(GOLD.AU)$ , which already made fresh highs last week, added nearly 2% more. Bitcoin $iShares Bitcoin Trust ETF(IBIT)$ bounced 3.6%. The dollar index, meanwhile, has pulled back sharply.
All Eyes on Next Week’s FOMC
The next big moment is the September 17 FOMC meeting. With Powell turning dovish, the labor market cooling sharply, and inflation looking tame, there’s virtually no excuse for the Fed not to cut. A 25-bp move is seen as a done deal — the real question is whether the Fed might surprise with a 50-bp cut and what tone Powell strikes at the press conference.
Right now, there are two main scenarios on the table:
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Bearish Case: The Fed cuts 25 bps but adopts a more hawkish tone — emphasizing the recent uptick in CPI, warning about tariff-related inflation risks, and signaling caution about future cuts. This would likely dampen expectations for consecutive rate cuts and could weigh on markets in the short term.
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Bullish Case: The Fed cuts 25 bps (or even 50 bps) and keeps a dovish tone — stressing labor-market weakness, downplaying the urgency of returning inflation to exactly 2%, and keeping the door wide open for more cuts. This would likely boost risk assets further as markets double down on the “triple cut” narrative.
Invesight Viewpoint
While next week’s meeting is shaping up to be market-friendly, a lot of good news is already priced in. If Powell’s tone is less dovish than investors expect, we could see a sharp pullback. And remember — this meeting won’t lock in the entire cutting cycle. The Fed’s path will stay highly data-dependent, and risks remain: if CPI re-accelerates, the U.S. could face a stagflation scenario that would put the Fed in a much tougher spot.
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