Investors Await Answers as Fed Balances Inflation and Jobs, Says Northwestern Mutual

Markets are entering a crucial period as investors weigh how the Federal Reserve will respond to slowing labour market conditions alongside stubborn inflation, according to Brent Schutte, chief investment officer at Northwestern Mutual Wealth Management Company.

“Over the next few months, investors are hoping the market will reveal the answer to a three-part question: Do tariffs cause slowing growth and labour market retrenchment, inflation or both?” Schutte wrote. “And if it is both, how will the Fed handle interest rates without putting its dual mandate of maximum employment and stable prices at risk?”

The commentary pointed to signs of economic strain. Revised Bureau of Labor Statistics data showed the U.S. economy lost 258,000 jobs across May and June, while inflation remains above the Fed’s 2 percent target. Core PCE inflation rose 2.9 percent in the 12 months through July, “the highest annual rate since February,” Schutte noted.

Despite these headwinds, consumer demand has held up, with spending rising 0.5 percent month-on-month in July.

Goods inflation slipped into negative territory, but services prices advanced 0.35 percent, leaving year-on-year services inflation at 3.6 percent.

For Schutte, this “presents a significant challenge for the Fed when evaluating interest rates” because persistent services inflation could signal deeper price pressures.

The Fed is under political pressure to cut rates, with President Donald Trump pushing for easier policy ahead of the September 17 meeting.

But Schutte warned that Powell faces a “tightrope” between boosting the labour market and controlling prices.

Powell said “the balance of risks appears to be shifting” in terms of inflation, while Schutte added that the upcoming BLS report “could be a major deciding factor as to whether the Fed opts to cut rates at its September 17 meeting.”