Fed caught between inflation concerns and soaring jobless claims

The Federal Reserve faces a huge test next week as it weighs the state of the economy under President Trump, with inflation running hotter than desired but a worsening jobs situation all but requiring an interest rate cut.

The federal government said Thursday that consumer prices rose 0.4% in August and 2.9% on a yearly basis. Although inflation is accelerating, and is higher than the Fed’s goal of 2% annually, it remains short of doomsday fears.

Jobless claims soared to 263,000 in the week ended Sept. 6, the most in nearly four years.

Economists said the situation will force the central bank to overcome its monthslong fear of tariff-induced inflation and cut rates at its meeting next week to jump-start the economy, as Mr. Trump demanded from Day 1.

A rate adjustment does have risks.

“The Fed is in a very difficult position,” said Wayne Winegarden, a senior fellow in economics at the Pacific Research Institute. “Inflation remains above the 2% target and is trending in the wrong direction. The jobs market is also weak. These trends indicate that stagflation is a growing risk, which is especially troubling for an economy.”

Given that context, he said, “sound arguments can be made to lower rates and to keep them steady.”

In all likelihood, the die has been cast. CME FedWatch on Thursday put the probability of a 25-basis-point cut at 93%.

The central bank’s benchmark federal funds rate has been at 4.25-4.5% since December. The rate drives interest rates on consumer loans including on autos, credit cards and mortgages.

The Fed’s rate-setting committee projected cutting rates at least twice this year and hasn’t done so, increasing the likelihood it will act this time.

The Bureau of Labor Statistics said the consumer price index for August was only slightly above Wall Street estimates of 0.3%. Core inflation, a reading that subtracts highly volatile energy and food prices, showed a monthly gain of 0.3% and a 12-month increase of 3.1%, which was in line with forecasts.

The BLS said coffee and beef prices were up, and an increase in shelter prices was a major factor in the overall increase. Indexes for medical care, recreation and communication were “among the few major indexes that decreased in August,” the bureau said.

Stocks surged after the CPI report was released as investors bet the Fed was on track to cut rates.

“Without a doubt, the Fed is going to cut by at least 25 basis points, if not 50,” said Kishore Kulkarni, a distinguished professor of economics at Metropolitan State University of Denver. “Lower interest rates are going to at least make the housing market do much better, and that is kind of needed.”

The White House said the Fed should have acted sooner to give borrowers better terms and ease the transition to its economic agenda of tariffs, deregulation and tax cuts.

CPI is tracking at an annualized rate of 2.3%, “consistent with low and stable inflation,” White House press secretary Karoline Leavitt said.

“As the Trump economic agenda continues to take effect, the trillions of dollars in private sector and foreign investments, historic tax cuts, massive deregulation and energy dominance that the president is spearheading will fuel an economic boom,” Ms. Leavitt said. “President Trump was right all along: It is well past time for [Fed Chairman] Jerome ‘Too Late’ Powell to cut interest rates.”

The Fed was reluctant to cut rates because it feared inflationary pressure from Mr. Trump’s trade agenda.

He imposed a blanket 10% tariff on all imports earlier this year.

By late summer, the president had imposed 15% to 41% tariffs on more than 67 countries, raising levies to their highest levels in more than a century.

He is also implementing a 15% rate he negotiated with the European Union, Japan and South Korea.

Mr. Trump said his approach will force companies to make products in America and bring in billions of dollars in revenue for the U.S. government.

However, some economists fear businesses are starting to pass along the costs of tariffs to everyday Americans.

Heather Long, the chief economist at Navy Federal Credit Union, said it was noteworthy that inflation hit an annual rate of 2.9% in August, or “the highest since January and up from 2.3% in April.”

“The middle-class squeeze from tariffs is here,” she said on X. “It’s troubling that so many basic necessities are rising in price again: Food, gas, clothing and shelter all had big cost jumps in August.”

Rep. Brendan Boyle of Pennsylvania, the top Democrat on the House Budget Committee, called Mr. Trump a “con artist.”

“He promised to lower prices, but his reckless policies keep driving them higher,” Mr. Boyle said. “The only promises he has kept are to his billionaire buddies. Everyone else is left paying the price.”

Economists say a rate cut by the Fed is all but guaranteed at this point, so it’s a question of how far central bankers go in balancing stable prices and maximum employment.

“The risk of cutting rates is that inflation will start to accelerate again, and my personal judgment, I believe this is the greater risk,” Mr. Winegarden said. “A small rate cut would not appreciably increase these risks, but aggressive cuts run a large risk that inflation will heat back up.”

Others say the Fed should cut rates significantly to kick-start an American resurgence.

The producer price index showed that wholesale prices declined 0.1% in August, beating Wall Street forecasts.

Alfredo Ortiz, CEO of the Job Creators Network, said lower wholesale prices in August will be passed along in the coming weeks, resulting in lower consumer price inflation.

“The far bigger concern is the artificially high interest rates preventing small businesses from expanding and ordinary folks from securing affordable mortgages,” he said.

Central bankers are particularly mindful of the worsening job situation.

The U.S. added 22,000 jobs in August, a slowdown from the 79,000 positions added in July.

Earlier this week, the Bureau of Labor Statistics revised its job creation total downward by 911,000 positions for the 12 months ended in March, indicating a slowdown before Mr. Trump’s inauguration and enactment of sweeping tariffs.

Mr. Kulkarni said the economy has proved resilient despite these headwinds, partly because technological advances enhance production.

He said Mr. Trump is unlikely to keep sky-high tariffs of 50% on Brazil and India over the long term because the levies appear to be a negotiating tool. That should ease some of the inflationary pressure on the economy.

“We are knocking [on the door of] a more difficult time,” he said. “But we’re not there yet.”