Weekly focus: Road clear for US rate cut

The stage is set for the Federal Reserve to deliver its first rate cut this year on Wednesday after having been on pause since December. This week, we had the final big data release before the meeting, and it showed CPI inflation of 0.4% m/m, higher than expected and still some way from the Fed’s inflation target. However, focus is much more on the labour market currently, and here we had a negative surprise as the weekly initial jobless claims number was 263,000 for the first week of September, the highest since 2021. Even before this release, a rate cut next week was fully expected, and expectations of two additional cuts this year are becoming increasingly widespread.

Note, though, that most indicators for the US labour market are still consistent with the view that job growth is low because workforce growth is low, not because more demand stimulus is urgently needed. The jobless claims number is an exception, but these weekly numbers can be volatile and affected by one-off factors, which could well be the case this time around, as half the spike was driven by a single state, Texas. With inflation still on the high side – before the tariffs really impact consumer prices – the Fed could well choose to move more slowly after next week’s cut. Complicating the picture is of course also the pressure for lower rates from the Trump administration. This week, a court ruled that Lisa Cook can stay on the Fed’s Board of Governors for now despite President Trump’s attempt to fire her.

In contrast to the Fed, the ECB seems done with rate cuts, and that view was confirmed at this week’s meeting. The ECB staff actually delivered some ammunition to those arguing for one more rate cut, in that the updated economic projection shows inflation being below 2% on both headline and core measures in both 2026 and 2027. However, ECB president Lagarde downplayed this at the press conference, arguing that the 2027 forecast was very close to 2% and that inflation is being temporarily dragged down by a stronger EUR. In France, the prime minister lost a confidence vote as expected and the president has appointed his close ally Sébastien Lecornu as new head of government. It is highly doubtful that he will be more successful than his predecessors in improving public finances, but markets did not react further, following the recent relative weakness of French bonds.

While the FOMC meeting is clearly the main event in the coming week, other central banks are also worth watching. The Bank of England is widely expected to keep rates unchanged but there is considerable uncertainty over the path forward see also Bank of England Preview - Guidance in focus as cutting cycle is nearing its end, 12 September. Just ahead of the meeting, we will get labour market and inflation data which could also be key. Also, the Bank of Japan is expected to be on hold, but expectations are that a rate hike is drawing near, although the uncertain political situation could affect the outlook. In Japan, there will also be an important inflation data release ahead of the meeting. Norges Bank is expected to cut rates, see Market Movers Scandinavia below. In China, we will get the monthly release of most economic data on Monday morning with focus especially on retail sales and housing market indicators.

Download The Full Weekly Focus