The Fed, Don Quixote, and Interest Rates

The Federal Reserve has what’s called a "dual mandate"—keep everyday prices stable while promoting an economy that creates jobs.

Managing that dual mandate is becoming more challenging this year, with prices and jobs giving mixed signals.

Let’s start with inflation. The Fed has a preferred inflation report called the Personal Consumption Expenditures Price Index (PCE). It’s similar to the Consumer Price Index but has some unique features that the Fed likes. The most recent update showed prices increased 2.8 percent for the year—a little “hotter” than the Fed wanted to see.

At the same time, the latest jobs report showed the economy added 73,000 jobs—a little "cooler" than what the Fed wanted to see. Worse, the Bureau of Labor Statistics (BLS) revised its previous two months' jobs stats lower.

Will the Fed adjust interest rates at its next scheduled meeting to boost job growth despite inflation being slightly higher than its 2 percent target?

In our chart, you can see that speculators believe there is a 91 percent chance the Fed will make a move at its September meeting and a nearly 60 percent chance it will make another move in October. 

It’s important to remember that these outlooks can change on short notice. Financial, economic, political, and regulatory issues can influence the thinking about rates. For example, before the most recent jobs report, speculators were uncertain if the Fed would change rates this year. 

Have you ever read Don Quixote? The novel originated the phrase "tilting at windmills," which some believe is a warning about fighting battles with imaginary foes. 

Perhaps we should coin the phrase, "tilting at the Fed."

To us, this means not fighting battles with the Fed before it decides on short-term interest rates. Let’s wait and see what happens in the months ahead before considering any actions. 

CNBC.com, July 31, 2025. “Inflation higher than expected, Fed’s preferred gauge shows”

CNBC.com, August 1, 2025. “U.S. added just 73,000 jobs in July and numbers for prior months were revised much lower”