Wall Street is looking towards a rate cut in September. However, some economic reports could shatter that illusion.

Fed Chair Jay Powell has allowed for a rate cut. But he also warned that everything depends on whether the employment and inflation figures stabilize.

Powell stated that the current high borrowing costs are pushing into the labor market. And that, he suggested, could justify a rate cut by mid-September. That was enough for the market to react positively. U.S. stocks rose.

Bond yields fell sharply. Traders immediately estimated a 75% chance the Fed will cut the key interest rate by a quarter point at the next meeting. The current federal funds rate is between 4.25% and 4.5%, but the market has priced in several deeper cuts through 2025.

Traders are bracing for CPI and jobs data to decide on a cut in September.

However, this bet could fail quickly. Powell only hinted, not promised. And some insiders and around the Fed are skeptical. The Fed is caught between its two legal mandates, keeping employment strong and prices stable. Powell acknowledged that things do not look good on either side.

The July jobs report shows a sharp slowdown in hiring. That figure comes after the Fed's last meeting. It left officials puzzled, but the unemployment rate of 4.2% helps alleviate some pressure. The issue is if this rate rises, the narrative will change.

Meanwhile, the tangled inflation part of Trump's economic moves. His new tariffs on foreign goods have sparked a fierce debate within the Fed. Some believe the price increase will pass. Others think it could persist.

Businesses say the worst impact will be felt after pre-tariff inventories run out. Consumer prices rose 2.7% year over year in July. Not perfect, but not completely off course.

The personal consumption price index, the Fed's preferred consumer price index, rose 2.6% in June, above the 2% target. Powell has downplayed this with a line: "We will not allow a one-time increase in prices to become a persistent inflation problem."

That is the tightrope the Fed is walking. Two reports released in September, the August jobs report on the 5th and the CPI on the 11th, will be crucial. Michael Gapen at Morgan Stanley said Powell's style is soft, but not soft enough to guarantee a cut.

"It cannot be asserted that the Fed will cut in September, but it comes as close as possible with the data between now and then," he said.

The division within the Fed deepened as Trump criticized the central bank ahead of the vote.

While the market debates, the Fed itself is divided. Alberto Musalem, who runs the St. Louis Fed and votes this year, said inflation still appears to be too stubborn.

"It is possible, though not the baseline case, that there could be persistence," he told Reuters after Powell's speech. Boston Fed President Susan Collins also does not think the decision is final. She told Bloomberg, "It's not a done deal about what we will do in the next meeting. And we will have more data from now until then."

Jeff Schmid, head of the Kansas City Fed, thinks the labor market is still strong enough. Austan Goolsbee from the Chicago Fed is uncertain. He is worried about persistent inflation, especially in services. All of them vote on interest rates, and clearly, not everyone is on the same page.

Inside the Fed board, cracks are showing. In the last vote in July, Michelle Bowman and Christopher Waller, both sitting governors and potential successors of Powell, voted for a quarter-point cut. It was the first time two governors did not support the chair on interest rates since 1993.

All of this is happening while Donald Trump, currently staying in the White House, is publicly criticizing the central bank. He called Powell "dumb" and "an idiot" who is always "too late," and demands a sharp cut down to just 1%.

Trump's pick to replace Adriana Kugler, Stephen Miran, is expected to vote for a cut if confirmed in time by the Senate.

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