August 29, 2025
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Akey inflation measure closely watched by Federal Reserver policymakers is heating up, complicating the case for the interest rate cut that is widely expected next month.
Core inflation as measured by the Personal Consumption Expenditures (PCE) index rose 2.9% in July compared to a year earlier, up from a 2.8% annual gain in June, the Department of Commerce reported Friday.
Core PCE, which excludes food and energy prices, is the measure Fed policymakers typically use to judge progress toward their goal of keeping annual inflation at 2%.
Despite the uptick in the key inflation metric, financial markets continued to view a Fed rate cut at the Federal Open Markets Committee (FOMC) meeting on Sept. 17 as virtually assured.
Bond investors put the probability of a quarter-point cut in September at 87% following the PCE report, a few points higher than earlier in the morning, according to the CME Group’s FedWatch tool.
“This mostly unremarkable inflation readout means that all eyes will be on the upcoming jobs report” next week, says Realtor.com® Senior Economist Joel Berner. “If employment figures come in weak again, the Fed will likely vote to cut rates, but a strong jobs rebound combined with still-high inflation may cause them to delay.”
The Fed uses higher interest rates to fight inflation, and lower rates to stimulate the economy and boost job creation.
In a speech last week, Fed Chair Jerome Powell signaled his openness to lowering the benchmark rate next month, saying the “balance of risks” in the economy was shifting away from inflation and toward rising layoffs.
Although the Fed doesn’t set mortgage rates, those rates have been falling in anticipation of a September rate cut, with the average 30-year fixed mortgage rate falling to a 10-month low of 6.56% this week, according to Freddie Mac.
“With regard to the housing market and mortgage rates, a Fed cut of the short-term rates will give long-term rates a bit of room to fall further and provide some relief to prospective homebuyers who are on the margins of being able to afford a mortgage payment,” says Berner. “Lower mortgage rates will mean more homebuying activity and hopefully a late-year surge to follow what has been a very slow summer buying season.”
Core PCE is the main measure Fed policymakers use to judge progress toward their 2% inflation target, rather than the Labor Department’s better-known Consumer Price Index (CPI).
While CPI includes detailed categories of goods that are useful to consumers and journalists in tracking rising prices, PCE covers a broader swath of the country, including rural areas, and is more sensitive to changes in consumer behavior.
Last month, overall inflation as measured by CPI rose 2.7% annually, unchanged from June. Core CPI, excluding volatile food and energy prices, ticked up to 3.1% annually.
However, July’s jobs report was stunningly weak, increasing the urgency for a rate cut. The Labor Department report showed the economy added just 73,000 jobs last month, far fewer than expected, and also revised the May and June job figures downward by a massive combined 258,000.
Political drama surrounds next FOMC meeting
Although the Fed takes pains to maintain its independence and avoid the appearance of political influence, the central bank now finds itself thrust into the middle of a political storm by President Donald Trump and his allies.
On Monday, Trump announced his intent to fire Fed Gov. Lisa Cook, one of the 12 FOMC members who set rate policy, over claims a Trump appointee made on social media that she committed mortgage fraud.
Cook promptly challenged the firing in a lawsuit, arguing that the president lacked sufficient cause to remove her and seeking a court injunction confirming her ability to serve on the Fed Board of Governors.
An emergency hearing in the case was scheduled for Friday morning in federal court in Washington, D.C.
Trump has for months demanded that Fed policymakers dramatically cut interest rates, which would juice the economy and reduce government borrowing costs.
Trump has also accused Powell of “hurting the housing industry badly” by leaving the Fed policy rate steady, saying that “people can’t get a mortgage because of him.”
The Fed, wary of lingering inflation, has kept its key overnight interest rate steady at a range of 4.25% to 4.5% since December, angering Trump and his allies who have demanded rate cuts.
Mortgage rates have averaged above 6.5% since the beginning of the year, adding to affordability woes for homebuyers and keeping home sales suppressed near a 30-year low.
Realtor.com
