Double Reversal? U.S. PPI Soars Beyond Expectations — Is a Fed rate cut still a done deal?

TradingKey - On Wednesday morning (U.S. Eastern Time), the U.S. Bureau of Labor Statistics released the latest Producer Price Index (PPI) data:

• July PPI rose 3.3% year-over-year, far exceeding the expected 2.5% and marking the highest level since February.
• Month-over-month PPI jumped 0.9%, the largest increase since June 2022.

Following the release, U.S. equity futures quickly turned lower:

• Nasdaq 100 futures dropped 0.36%
• S&P 500 futures fell 0.35%
• Dow Jones futures declined 0.29%

The Dollar Index rose 0.21% intraday, while spot gold dipped 0.32%.

Market expectations for an aggressive Fed rate cut in September were quickly scaled back. Just days earlier, weak employment data had made a September rate cut appear certain, but the red-hot PPI reignited hawkish sentiment.

Mary Daly, President of the San Francisco Federal Reserve, said she opposes a 50-basis-point cut at the September meeting, warning it would send an “unnecessary sense of urgency” about labor market conditions.

Earlier in the week, after CPI data was released, Goldman Sachs published a report stating that U.S. consumers are absorbing an increasing share of the cost from tariff policies — projected to reach 67% by October. This stands in stark contrast to Trump’s urgent calls for rate cuts. In response, Trump sharply criticized the Goldman team, saying they “should be replaced.”

Notably, the Fed is deeply divided internally:

• A majority of Fed officials believe tariffs will lift inflation in the second half of the year.
• Mary Daly acknowledged tariffs will push prices higher in the near term but may not create a persistent inflationary pressure that requires monetary offset.
• Austan Goolsbee, President of the Chicago Fed, said it’s unclear whether tariffs have only a one-time effect, emphasizing the need for more data — and highlighted that services inflation remains concerning.
• Meanwhile, Fed Governors Michelle W. Bowman and Christopher J. Waller continue to support rate cuts, with Bowman even suggesting three cuts this year.

[Source: CME Group]

For now, the market has scaled back bets on a large rate cut, but a 25-basis-point reduction in September remains the base case. As the debate intensifies, investors will be watching closely for any new signals that could tip the balance toward easing — or delay it further.