Cuts on the Lips, Core at 2.9%: September 26 Data Clash with the Fed’s Easing Drumbeat

On September 26, 2025, the BEA dropped a one-two release that should have quieted the rate-cut chorus: core PCE held at 2.9% y/y with +0.2% m/m, while Q2 real GDP clocked a 3.8% annualized pace. Instead, the Fed’s public tone—pivoting since late August—kept leaning toward cuts under the banner of “conflicting data.” Conflicting? Yes. Compelling enough to rush? Not by what the numbers actually say.

Here’s what the data reveals:
- Demand is holding up: retail sales +0.6% m/m and +5.0% y/y, nominal PCE +0.6% m/m, real PCE +0.4%.
- Inflation is not at target: headline PCE +2.7% y/y, core PCE +2.9% y/y; upstream core pressures re-firmed with PPI core +0.3% m/m, +2.8% y/y.
- Labor is softening: August payrolls +22,000, unemployment 4.3%, participation at 62.3%.
- The timing is off: the easing rhetoric (from 8/28 into October) preceded and then coexisted with firm demand and sticky core inflation.

The Rhetoric Pivot Arrived Before the Data

A dovish turn with a timing problem
Governor Waller’s “Let’s Get On with It” on 8/28 and his 10/16 “Cutting Rates in the Face of Conflicting Data” speeches framed rate cuts as plausible—even prudent—despite the data still flashing near-3% core inflation and sturdy consumption. Chair Powell’s 9/23 “Economic Outlook” struck a balanced tone on growth and recalibration, but the messaging cadence since late August has nudged markets toward easing expectations faster than the inflation prints justify.

• The numbers that mattered were known: PPI core +2.8% y/y on 9/10 flagged stickiness upstream; PCE core +2.9% y/y on 9/26 confirmed it.

• The Fed’s “conflict” framing is fair. The inference—cutting soon—is where the alignment cracks. With core near 3%, the asymmetric risk still tilts toward easing too early.

Demand Didn’t Get the Memo

Consumers kept spending, and growth didn’t flinch
The August spending profile didn’t look like an economy desperate for a dose of monetary stimulus:
- Retail sales +0.6% m/m, +5.0% y/y (9/16).
- Nominal PCE +0.6% m/m, real PCE +0.4%; saving rate at 4.6% (9/26).
- Q2 real GDP printed +3.8% annualized (9/26).

This is not the backdrop for a fast easing cycle. If anything, it’s the kind of demand pulse that risks keeping services inflation elevated even as goods disinflation largely plays out. Messaging that foregrounds labor softening while backgrounding durable consumption risks sending the wrong signal to markets—and to price-setters.

Inflation’s Sticky Middle

Upstream firmness meets a stubborn core
The August inflation mix wasn’t a victory lap:
- Headline PCE +0.3% m/m, +2.7% y/y; core PCE +0.2% m/m, +2.9% y/y.
- PPI final demand -0.1% m/m, but the measure that matters—PPI final demand less food, energy, and trade—rose +0.3% m/m and +2.8% y/y, the largest 12-month advance since March.

The Fed’s September emphasis on nonmonetary and supply-side help (Miran, 9/22) isn’t wrong, but August data suggest supply relief alone isn’t finishing the job. With core disinflation stalling near 3%, sequential monthly prints need to convincingly slow before “cuts on principle” make sense.

Yes, Labor Is Cooling—But Not Enough to Declare Victory

Weak payrolls, rising unemployment, but still not a green light
August payrolls added just +22,000; the unemployment rate rose to 4.3%. Participation at 62.3% and the employment-population ratio at 59.6% are down 0.4 pp over the year. Long-term unemployed rose to 1.9 million (+385,000 y/y), 25.7% of the total unemployed.

That’s genuine softening, and it validates “conflicting data.” But paired with firm demand and near-3% core, the weight of evidence argues for patience. The bar for rapid cuts should remain high until the sequential inflation pulse—month after month—clearly weakens.

Numbers Behind the Narrative

What This Means for Markets

Policy path: slower, more conditional
- Credibility risk: Signaling cuts with core PCE ~2.9% and PPI core +2.8% y/y risks a perceived tolerance for above-target inflation. The Fed will likely move only if incoming monthly inflation prints soften repeatedly and labor loosening persists.
- Market-pricing vs. behavior: Markets may run ahead on easing. The Fed’s likely cadence is incremental, data-verified, and reversible.

Positioning playbook
- Rates: Favor modest curve steepeners over outright long duration. Front-end may stay sticky if cuts slip; the long end remains sensitive to resilient nominal growth.
- Inflation protection: Maintain some TIPS exposure vs. nominals while core runs near 3% and upstream measures re-firm.
- Credit: Stay up-in-quality. Investment grade over high yield as labor cools but demand hasn’t cracked. Watch downgrade risk if unemployment drifts higher.
- Equities: Barbell cash-generative defensives with selective cyclicals tethered to the consumer. Pricing power in services remains an asset if core disinflation stalls.
- Dollar/commodities: A slower-easing Fed relative to market hopes can support the dollar. Upstream firmness argues for measured exposure to producers with margin discipline.

What to watch next
- Monthly core PCE momentum: We need multiple 0.15–0.20% m/m-type prints before cuts look clean.
- PPI core: Early read on services margins and pipeline pressures; August re-firming deserves follow-through monitoring.
- Labor breadth: Payroll diffusion, long-term unemployment share, and participation—key to gauging slack without overreacting to a single weak print.

The Investor Takeaway

The Fed’s “conflicting data” story is fair; the easing tilt since late August is not. With core PCE at 2.9% y/y, PPI core at 2.8% y/y, retail sales +5.0% y/y, and Q2 growth at 3.8%, the risk isn’t missing the first cut—it’s cutting into still-resilient nominal growth and stickier-than-advertised inflation. Position for a slower, conditional easing path: prefer curve steepeners over heavy duration bets, keep some inflation hedges, stick with high-quality credit, and favor equity names with pricing power. Until sequential inflation meaningfully cools, trade the data—not the speeches.