Fed's upcoming forecast on inflation for the current week: An analysis
The Federal Open Market Committee (FOMC) is set to convene on September 16-17, 2025, with the focus on potential interest rate adjustments. Recent revisions in labor numbers have been influenced by factors such as fewer survey responses due to COVID, a changing mix of new and closing firms, immigration, and demographics.
The federal funds rate, the interest rate that banks charge each other for overnight borrowing, is a key area of interest in the upcoming meeting. The current positioning of the FOMC members indicates a strong expectation for a 0.25% interest rate cut at the September 17, 2025 meeting, with the target range expected to be 4.00% to 4.25%.
Economic indicators such as the Producer Price Index (PPI) and the Consumer Price Index (CPI) have been under scrutiny. The recent PPI came in softer, while the CPI tracks a fixed basket of goods based on what households report buying. Ongoing increases in prices are what policy makers watch closely, as they can foreshadow moves that later show up in consumer indexes.
Inflation, defined as the increase in the price level, is a critical aspect of the economic landscape. If inflation is running at 2%, the real rate is 1%, and the nominal rate is about 3%. Most central banks aim for about 2% inflation to avoid a deflationary cycle.
Immigration is affecting not just the labor market but also economic growth. In sectors such as agriculture, employers rely heavily on immigrants, causing issues with crop harvests and subsequent exports.
The Fed influences rates mainly by 'forward guidance', shaping market expectations in real time. Every meeting of the Fed brings a policy statement. Every other meeting includes the Summary of Economic Projections, including the dot plot.
The Philadelphia Fed's Manufacturing Business Outlook Survey serves as a useful pulse check on hiring and growth in the region. The Personal Consumption Expenditures measurement, which is broader and adjusts for shifts in consumer behavior, is another important economic indicator.
It's important to note that a one-time increase in prices is not considered inflation. However, ongoing increases in prices are what policy makers watch closely.
Market expectations also show further rate cuts in October, with a likely range of 3.75% to 4.00% being priced in. The Fed's actions will undoubtedly have significant implications for mortgage, auto, and credit loan rates, which are tied to longer-term treasuries, a sector the Fed does not directly control.
As the FOMC meets, the focus will be on how these factors influence their decision-making process and the potential impact on the broader economy.
