The Fed's Rate Cut Trap

Weekly Market Update
The S&P 500 finished the week up 1.59% as market participants shrugged off this week's hotter-than-expected consumer inflation data, viewing it as insufficient to derail the Federal Reserve's anticipated rate cut next week.

The bull market continues as optimism drives market sentiment. Market participants believe inflation has been subdued and the Fed will soon embark on a series of rates. I encourage you to examine the actual inflation data I've arranged in the table below. Inflation has been rising, but like a frog in water heating toward a boil, the market remains comfortable, convinced the temperature won't reach a level that derails rate cuts.

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Here's What Actually Happened

• Tuesday - Jobs Revision Shock • The Bureau of Labor Statistics reported the US created 911,000 fewer jobs than initially calculated through March 2025—the largest preliminary benchmark revision on record (preliminary series since 2000). What appeared to be an economy generating 147,000 monthly positions was actually producing approximately 71,000 per month over that period.
  
• Wednesday - Producer Prices Decline • PPI fell 0.1% when economists expected a 0.3% rise. Trade margins for wholesalers and retailers fell 1.7%, while machinery and vehicle wholesaling margins declined 3.9%—businesses are eating much of the tariff costs rather than raising prices in an effort to keep customers and market share.
• Thursday - Unemployment Claims Surge • Initial claims rose to 263,000—the highest since October 2021. The four-week average reached 240,500 even after adjusting for Texas flooding impacts, confirming a gradual softening trend.
• Thursday - Consumer Prices Accelerate • CPI rose 0.4% in August (double July's pace) pushing annual inflation to 2.9%, with core inflation hitting 3.1%—the highest since February. Food increased 0.5%, shelter rose 0.4%, and gasoline jumped 1.9%.

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Why This Divergence Matters
Producer prices are falling while consumer prices keep rising. Retailers are caught in the middle—tariffs increase their costs, but they can't raise prices enough without losing customers. Their profit margins are shrinking. This can't last. Either retailers raise prices more (worsening inflation and reducing the likelihood of rate cuts) or they cut workers (prompting the Fed to cut more aggressively). There's no good option.

Markets are betting on a quarter-point cut September 17. The fed funds rate sits at 4.25%-4.50%, unchanged all year. Fed Governor Waller says cut now—"get on with it." But here's the problem: inflation at 2.9% remains above the Fed's 2% target, with core inflation accelerating to 3.1%. The Fed faces a difficult choice—cut rates to help weakening jobs and risk reigniting inflation, or stay high and risk deeper economic weakness. The real issue may not be interest rates at all. Businesses haven't stopped hiring because borrowing costs are too high —they've stopped because policy uncertainty makes it difficult to plan.

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What This Means Going Forward
The September 17 Fed meeting becomes pivotal. The data pulls in opposite directions—job revisions say "cut," inflation says "wait."

Markets have priced in a cut, but the real question is whether monetary policy can fix what's actually broken. When employment data needs million-job corrections and businesses slow hiring due to trade uncertainty, rate cuts may not address the real problem.

Watch the gap between producer and consumer prices. How it resolves will determine whether the Fed gets its soft landing or faces harder choices ahead.

The current environment sends mixed signals—weak jobs but persistent inflation, falling wholesale prices but rising consumer prices, strong stocks but compressed profit margins. These contradictions can't coexist indefinitely. How they resolve will shape the path forward.

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Employment Indicators
Employment data helps gauge whether consumers have jobs and money to spend. Consumer spending accounts for more than 70% of GDP.

Indicator	Current Value	Status
Initial Claims for Unemployment	263,000	Rising
4-Week Average of Initial Claims	240,500	Rising
4-Week Average of Continuing Claims	1.946M	Stable
Unemployment Rate	4.3%

Note: Values above 250K for the 4-week moving average of initial jobless claims could signal economic weakening. Historical analysis indicates that sustained readings above 300K often coincide with recessionary periods.
Next unemployment report: October 3,, 2025. Source: Department of Labor

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Inflation Measures (CPI Year-over-Year)

Month	Rate	Trend
October	2.60%	Deteriorating
November	2.75%	Deteriorating
December	2.89%	Deteriorating
January 2025	3.00%	Deteriorating
February	2.82%	Improving
March	2.39%	Improving
April	2.31%	Improving
May	2.35%	Deteriorating
June	2.67%	Deteriorating
July	2.70%	Deteriorating
August	2.92%	Deteriorating
September (est.)	3.01%	Deteriorating

Source: Bureau of Labor Statistics; Estimate from Federal Reserve Bank of Cleveland
Note: While inflation has moderated, new tariffs may cause temporary spikes in monthly data. Once tariffs have been in place for a full year, inflation should revert closer to the underlying trend.

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Disclosure:
This material is provided by Todd Van Der Meid, MBA, CFP®, through Rhino Wealth Management, Inc., a Registered Investment Adviser, solely for informational purposes. It is not intended as investment, tax, legal, or accounting advice. Investors should consult qualified professionals before making financial decisions.

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