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The Tug-Of-War Of The Fed's Dual Mandate
The Macro Institute's Weekly Economic Primer
The Macro Institute
August 18, 2025
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Outside of a few leading indicators offering an early read on August, this week is relatively quiet on the economic data front. This morning’s NAHB Index kicks things off, followed by Thursday’s Philly Fed release. Last week’s Empire Fed Index came in stronger than expected, though its inflation proxy, Prices Paid, remained elevated. This signals ongoing cost pressures in the early stages of the supply chain.
The bigger market focus will likely be Wednesday’s release of the Fed’s July meeting minutes. With markets already pricing in a near-certain September rate cut, this could mark a short-term window of vulnerability. Notably, the September FOMC meeting will follow the release of August CPI and PPI.
Meanwhile, Economic Utilization, a blend of manufacturing and employment utilization, has stabilized in recent months. Conditions are far different from those in 2024, when the Fed was easing policy, which adds complexity to the current decision-making backdrop. In short, those Fed minutes could carry more weight than usual.
The Macro Week In Review
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The Macro Week Ahead
💪 The Tug-Of-War Of The Dual Mandate
Frequent Macro Monday readers will recall our consistent warnings about a late-summer or early-fall inflationary threat. Last week brought the first real warning signs of such, with both Core CPI and PPI jumping month-over-month to 3.1% and 3.7%, respectively.
This matters because many market participants still assume 2.0% inflation is a strict target. However, following the GFC, when inflation consistently undershot the Fed’s target, hitting 2.0% posed little challenge on the upside. But in 2020, the Fed adopted a more flexible inflation target, allowing deviations from 2%.
While controversial, the key point is that inflation appears to be reaccelerating, and our leading indicators suggest we’re in the early innings of this new regime. A persistently tight labor market is keeping a floor above 2%, and trade policy is only adding fuel to the fire.
In a different environment, one where markets expected the Fed to hike or was actually tightening, an above-trend inflation would be less problematic. But today, bond market pricing implies an 82% chance of a September rate cut and two cuts (50 bps) by year-end. This tells us investors are prioritizing the employment side of the mandate over inflation.
July’s soft payrolls print and the uptick in unemployment to 4.2% triggered the jump in rate cut odds. Trends in jobless claims and employment surveys also point to slower job creation. Still, in our view, one month of lackluster (and heavily revised) jobs data isn’t enough to justify a new cutting cycle. The labor market remains structurally short of workers, and demographics, plus immigration policy, will likely offset any cyclical weakness.
📆 The Week Ahead
Preliminary August data will keep rolling in this week. Last week, the Empire Manufacturing Index came in strong at 11.9 vs. 5.5 the previous month. The Philly Fed Index drops on Thursday, just ahead of S&P Global’s PMI at 9:45 am. S&P’s manufacturing PMI has hovered around the key growth vs. contraction threshold of 50 since early 2024. We expect near-term choppiness in national and regional PMIs to continue before trending higher into 2026 as Fed cuts and fiscal stimulus flow through.
Housing remains a different story, reacting more quickly to long-end yield changes. As of Friday, the 30-year mortgage rate (Bankrate.com) fell below 6.7%, its lowest point since April and down from 7.4% in January. We’ll see if that helps buyers when the NAHB prints on Monday at 10:00 am, with another sub-35 reading likely. In our view, the recent mortgage rate drop is hardly stimulative. Rates remain unattractive to buyers anchored to the 3%-5% post-GFC range and home prices haven’t meaningfully eased.
Existing Home Sales make up the bulk of the housing market. With high rates limiting buyers and deterring sellers, who don’t want to swap into a higher mortgage, inventory is only rising slowly. That may put mild downward pressure on prices, but relative to the pandemic peak, it’s negligible for most buyers. Bottom line … any July housing strength should be muted.
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