What Wall Street is saying about the central bank’s next rate decision

Weak labor market data overshadowed a sticky inflation print last week, keeping investor expectations intact that the Federal Reserve will cut interest rates at its policy meeting on Wednesday.

Government data released Thursday showed that consumer prices rose 0.4% in August from the previous month, an uptick from July's 0.2% increase. Meanwhile, separate data showed weekly jobless claims rising to 263,000 — the highest in nearly four years, up from a revised 236,000 the prior week.

The Fed weighs its dual mandate of full employment and price stability when deciding whether to change interest rates. Given the dynamic of a slowing jobs market coupled with sticky price increases, Wall Street strategists told Yahoo Finance that the Fed has a complicated decision ahead.

“It's the worst kind of setup for the Fed,” Claudia Sahm, New Century Advisors chief economist and former Federal Reserve Board economist, told Yahoo Finance. “They will not be cutting because we have good news on inflation. They'll be cutting because we have bad news on employment.”

Sahm expects the Federal Reserve to cut rates by 25 basis points during its two-day meeting this week. She noted, though, that inflation is “still too firm.”

Other strategists agreed: “Inflation is still elevated. It's been elevated, and it's moving in the wrong direction right now,” Collin Martin, fixed income strategist at Schwab Center for Financial Research, told Yahoo Finance.

Sticky inflation may keep the Fed cautious after September, RSM chief economist Joe Brusuelas said.

“Yes, you're going to get your rate cut out there in trading land,” Brusuelas told Yahoo Finance. “But I have to tell you, the underlying tenor of the data doesn't suggest that it's a lock that you're going to get three rate cuts before the end of the year.”

Read more: How jobs, inflation, and the Fed are all related

As of Friday, investors were pricing in a 76% probability of three rate cuts this year, according to the CME FedWatch, as the labor market shows increasing cracks.

Thursday's jobless claims data was the latest to underscore the slowdown. A sweeping jobs revision released earlier this week showed the US employed 911,000 fewer people between April 2024 and March 2025 than originally reported.

Still, the slowdown doesn't appear to be pushing the economy over a cliff.

“We're not getting this hard landing like collapse in the job market,” Economic Cycle Research Institute co-founder Lakshman Achuthan said. “This could get rough at some point … but it's not yet.”