A September rate cut now carries a 93 percent probability, according to CME’s FedWatch. The country’s largest banks, meanwhile, can’t even agree on the year, let alone the month, as their strategists make the rounds on U.S. financial news.
The Producer Price Index (PPI) rose 0.9 percent in July, the largest monthly increase in more than three years and well above economists’ forecasts. Core PPI, which strips out food and energy, accelerated to 3.7 percent year over year from 2.6 percent in June, compared with expectations for a 3 percent gain. The surprise revived concerns that higher costs for businesses could be passed on to consumers, stalling recent progress on inflation.
“The PPI suggests inflation isn’t the non-story some people thought it was after Tuesday’s CPI print,” Chris Larkin, managing director of trading and investing at Morgan Stanley, told Yahoo Finance on Thursday. “This doesn’t slam the door on a September rate cut, but the opening may be a little smaller than it was a couple of days ago.”
Even so, futures traders remain almost certain the Fed will act. The CME FedWatch tool puts the probability of a 25-basis-point cut at the September policy meeting at 93 percent, a level that has barely budged since the PPI release.
But Wall Street’s economists are far from aligned. Their forecasts range from no cuts at all this year to five consecutive quarter-point reductions beginning next month.
No Cuts: Bank of America, Morgan Stanley
Bank of America’s economics team, led by Aditya Bhave, expects no rate cuts in 2025. In a research note published last week, shortly after the July jobs report, they argued the U.S. is heading toward stagflation, which is stagnant growth combined with persistent inflation, rather than recession. Cutting rates, they told clients, would risk aggravating the problem.
Bhave’s team pointed to two Trump administration policies: a sharp tightening of immigration rules and a fresh wave of import tariffs. Both, they said, are constraining labor supply and raising costs. Foreign-born workers have fallen by more than 800,000 since April, squeezing industries such as construction, manufacturing and hospitality. Tariffs, meanwhile, have pushed the effective U.S. rate to around 15 percent since early July, with early signs of the impact already visible in core goods prices.
Morgan Stanley chief U.S. economist Michael Gapen also projects no cuts this year, citing “enough inflation momentum” to keep policy on hold. Speaking to Yahoo Finance last week, he acknowledged the Fed “may just take comfort from the signal and cut in September,” but argued that immigration controls will keep the unemployment rate low and the labor market tight. Cutting now, he said, risks easing too soon while inflation is still above target.
Cautious Easing: Goldman Sachs
The forecast at Goldman Sachs changes depending on whether you are watching TV or reading their research. Robert Kaplan, the bank’s vice chairman and a former Dallas Fed president, told Bloomberg TV last week that he “leans towards” the Fed cutting in September but sees it as a one-off move rather than the start of an aggressive cycle. Uncertainty over how new tariffs will filter through prices makes patience advisable, he said, even as sluggish hiring argues for some insurance.
The bank’s research team, however, is more dovish. In a note published a day after Kaplan’s interview, Goldman economists projected three 25-basis-point cuts in 2025 and two more in 2026, taking the terminal rate to between 3 percent and 3.25 percent from the current range of 4.25 percent to 4.50 percent.
Dovish Turn: JPMorgan
JPMorgan Chase’s chief U.S. economist Michael Feroli has also shifted sharply toward the dovish camp. In a note issued after President Donald Trump nominated Stephen Miran, chairman of the Council of Economic Advisers, to the Fed’s board of governors, Feroli raised his forecast from one cut in December to three cuts starting in September.
Feroli argued that a third dissenting vote from a Fed governor, joining Christopher Waller and Michelle Bowman, who broke with Chair Jerome Powell in July to support a cut, could make leaving rates unchanged “unfeasible.” He also left open the possibility of a 50-basis-point cut if the August jobs report shows unemployment rising to 4.4 percent or higher.
Even with inflation still above the Fed’s 2 percent target, “the dismal July jobs report has made a September cut the path of least resistance,” Feroli said.
Most Dovish: Citi
Citi’s Andrew Hollenhorst is calling for the most aggressive easing path of all. In an interview on Bloomberg Surveillance earlier this month, he forecast five straight 25-basis-point cuts beginning next month, driven by what he sees as persistent weakness in labor demand despite a low unemployment rate.
“There’s been something very uncomfortable about this labor market for some time, which is that the hiring rate has been very low,” Hollenhorst said. “It would make all the sense in the world to cut in September.”
He argues that policy rates are still restrictive and should move toward neutral now that the risks between inflation and employment are more balanced. Core inflation ran at about 2.5 percent in the second quarter, only modestly above the Fed’s target.