The economic expansion has advanced from the initial recovery, and the focus is now on metrics the Federal Reserve is looking at to gauge the health of the economy. Since the Fed’s dual mandate is to keep prices stable and maximize employment, we will focus on labor and inflation metrics, keeping in mind the broader economic impact as well. We created a Fed Monitor to track some of the data points that will impact the Fed’s decisions to tighten financial conditions. Additionally, we try to quantify the data and information outside of the dashboard to determine if the Fed is being more dovish than the data, and likely to be more aggressive in the future, or if they are being hawkish relative to the data, and likely to be more conservative in the future.

The Federal Reserve (Fed) has just three FOMC meetings left in 2025, and momentum is building for a rate cut as early as September. Rates have been holding steady since the last cut in December 2024. While inflation remains above the Fed’s 2.0% target, the labor market has slowed markedly in recent months.

Headline CPI inflation rose 2.7% year-over-year (Y/Y) in July, while core CPI climbed 3.1% Y/Y. Annual inflation was trending lower but in recent months price pressures have edged higher. We have yet to see a widespread direct impact on consumer inflation from tariffs. Labor market growth, on the other hand, has slowed significantly. Over the last three months, nonfarm payrolls have increased by an average of just 35,000/month. Labor force participation among 25–54-year-olds (prime-age workforce) is also trending lower, suggesting softer labor demand. Positively, initial jobless claims remain low, indicating that companies are laying off employees at a low rate.

The Fed’s dual mandate of price stability and maximum employment is diverging, but it is becoming increasingly likely that the Fed will cut interest rates to provide support to the labor market. As of this writing, the futures market pricing in a 93% probability of a 0.25% rate cut in September. We are moving the Fed-O-Meter dial to the left, signaling a high likelihood of an imminent rate cut.