US CPI Data Hit 2.9% in August: Fed Rate Cut Soon in September

Fed Rate Cut in September 2025 Despite US CPI data Signals Inflation

Recent data, released for August 2025, came in slightly hotter than expected, yet markets remain confident that the Federal Reserve will push ahead with Fed Rate cut in the coming months. 

This is anticipated in the CME FedWatch Tool, which monitors market anticipations of future rate movements. Together, the latest consumer price index (CPI) figures and rate forecasts provide insight into the direction of U.S. monetary policy.

US CPI Data Report: Expectation vs Reality

The Consumer Price Index (CPI) is one of the most widely watched measures of inflation in the United States. For August 2025, the data showed:

• Core CPI (excluding food and energy): up 0.3% month-over-month and up 3.1% year-over-year, right in line with market expectations.

• Headline CPI (overall inflation): came in at 0.4% month over month and 2.9% year over year, both slightly higher than forecasts.

This headline figure marked the largest yearly increase in seven months, signaling that inflationary pressures remain more persistent than anticipated. Normally, such an uptick might encourage the Federal Reserve to hold off on cutting rates. However, the wider economic picture, with weakness in the labor market in particular, has kept the markets confident that monetary easing is on the horizon.

Source: Wu Blockchain X

Why & How Inflation and Jobs are Important Economic Conditions

• High inflation can lower consumer purchasing power and erode savings, which can put pressure on economic stability. The Fed normally fights by raising interest rates to cool demand. On the contrary, when it is under control, it makes it easier for monetary policy.

• Good employment growth is usually a good indicator of strong demand, while increasing unemployment is a weak indicator. A shaky job market makes the need for lower interest rates to encourage business activity and spending by consumers.

In the current environment, inflation is running a little bit above expectations, but the labor market is showing signs of stress. This trade-off leaves the Fed with little choice but to focus on supporting the jobs market with confidence that inflation will be contained broadly within the long-term target.

US Federal Reserve Future Meeting Expectations for Fed Cuts

Traders expect the Fed to start cutting rates soon despite stubborn Economic conditions.

September 2025: One Rate Cut Almost Certain

According to the FedWatch Tool, there is a 93% probability of the Federal Reserve lowering the Fed rate cut by 25 basis points (0.25) at their September 2025 meeting. This move would reduce the target range to 4.00-4.25%, the first cut following an extended period of restrictive policy in an attempt to cool inflation.

This high level of confidence is an indication that markets are effectively treating the cut as a done deal. Investors think the Fed is under pressure to prop up a weakening labor market and continue broader economic growth, even as inflation has been sending mixed signals in recent months.

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December 2025: Two Cuts by Year-End in Play

Looking further upstream, the FedWatch Tool says that there is a 92% chance that the central bank will have made at least two Fed rate cut by December 2025, lowering rates to 3.50% - 3.75%.

This anticipation means that markets anticipate a more accommodative approach up to the end of the year. Traders are placing bets that the slowing rate of job growth, decreasing price pressure, and weaker economic news will prompt the Fed to keep easing at a gradual pace rather than keeping rates unchanged.

What This Means for Markets

Favourable borrowing rates tend to provide relief to both businesses and households, which boosts the performance of the stock markets and the risk appetite. Concurrently, the greater liquidity and shift to risk-on sentiment could be beneficial to crypto markets as the easing cycle picks up.

The CPI report of August indicated that inflation is still sticky, but the employment data is weak enough to drive the Federal Reserve to a more accommodative position.