Fed Watch – 9/12/2025

The below transcript is a literal translation of the podcast audio that has been machine generated by Notta.

I’m Lauren Saidel-Baker, and thank you so much for joining me fort his September 12th edition of Fed Watch.

Inflation data’s out this week looks like the final nail in the coffin for a rate cut next Wednesday. So, will it be 25? Will it be 50 basis points? At this point, market sentiment is overwhelmingly in the camp of 25 basis points. Personally, that is where I fall. But if we do see a 50 basis point cut, I’m not taking that as dire news that the Feds sees the bottom falling out from the economy. They’ve surprised us before, they certainly will surprise us again in the future. But 50 basis points, 25 basis points, what we’re really watching is how many more cuts the Fed can do this year. How long into 2025 could we continue seeing cuts? If we see even up to 75 basis points of cuts in total in the remainder of 2025, I still don’t think that’s enough to materially move the needle. Unless your company is highly interest rate sensitive, I would not be trying to time the low of this cycle. And for our macro economy overall, this is is not going to be the shot in the arm stimulus that really turns the cycle on its head.

So let’s delve a little bit deeper into the inflation data. We saw CPI come out on Thursday. Now, the headline number was 2.9% year-over-year increase in the CPI. If we strip out the volatile food and energy categories, take just that core CPI, that’s where we saw 3.1% rise. So in all cases, we’re still seeing sticky inflation, very persistent inflation, certainly higher than the Fed’s target 2%. Keep in mind, this isn’t their preferred gauge, which is that PCE side, but we do get CPI data a little bit earlier in the month. That’s why there’s so much attention being put on these numbers. At the end of the day, this August CPI result was a slight tick up from the July number. Now, if you’ve been following Fed Watch and following our thinking here at ITR Economics, you know that we have been saying inflation would rise by the second half of 2025. So, this is looking more and more like that inflection point.

Delving down into the components of what is actually causing this inflation. Well, the factors are very broad based. We could get academic and talk about money supply, velocity of money, all of those technical aspects. But on a more fundamental basis, we can also just see the numerical increase in different categories. One of the big headlines that I’m sure you’re seeing that we as consumers are all feeling and love to complain about, it’s prices on grocery store shelves. Food costs, those are up 3.2% year-over-year. But the largest individual category of the CPI, that is shelter costs, so housing. The housing category was up 3.6% year-over-year. Now, that big category, you’ll note, is not one that tariffs will affect at least instantaneously. Yes, there’s some pass through in, say, lumber prices and the share of framing cost and building a new home. But at the end of the day, tariffs are going to impact these types of categories, and therefore the CPI overall, a little bit more slowly than they will, say, steel prices or copper prices.

So at the end of the day, I don’t think we have seen the full price pass through in tariffs, at least not yet. Our ITR analysis suggests that it takes between nine and 18 months to really see that full pricing impact coming from tariffs into final goods. So don’t think that just because we have not seen this price adjustment, whether it’s ongoing or whether it’s one time, is a separate discussion, we haven’t seen it come through yet. That doesn’t mean it isn’t still coming.

On a fundamental basis, though, we do like to focus on those very technical factors. We’re seeing broad based support from overall fiscal and monetary policy. That will be supporting inflation going forward. These persistent wage pressures, higher energy costs, the list goes on and on. So while we very likely, almost certainly, will get an interest rate cut next week don’t take this news coming out of the labor market and the news coming out of the Fed saying that inflation is done in and dusted. We still have much more focus here. If this is pertinent to your business, please be watching those costs, be watching those margins. We’re not out of the woods quite yet.

Stick with us, next week we will be unpacking the Fed rate decision, all of the messaging that comes out with that. Hope to see you again there on ITR Economics Fed Watch.