It’s becoming harder to take the Fed seriously when it’s gearing up to cut interest rates while inflation is still above target, risking what some fear could snowball into an inflationary spiral.
That was one of the warnings in a recent note from Creative Planning’s chief market strategist Charlie Bilello. “The Fed has lost all credibility when it comes to fighting inflation,” he said.
Bilello pointed to the Fed’s preferred inflation gauge, the core PCE index, which rose 2.9% year-over-year in July, its highest reading since February.
While still well below pandemic-era peaks, the pickup is far above the Fed’s 2% target and, in his view, it signals that inflation is accelerating again.
Despite the PCE data, Fed Chair Jerome Powell said at Jackson Hole last month that rate cuts could begin as early as September. Bilello begs to disagree.
The Fed “should be hiking rates, not cutting,” he said.
As InvestorsObserver reported, Bilello has long been against rate cuts until the estimated 11% of excess inflation accumulated since the pandemic is fully wrung out of the system.
He may not get what he wishes for. Fed funds futures on Friday priced in an 86% probability of a September cut. Odds of cuts in October and December are basically coin flips.
⚖️ Balancing the “stag” and the “flation”
While Powell has all but acknowledged the growing threat of stagflation, it doesn’t make his job much easier because he still has to choose between two evils.
Either you cut rates and boost the economy to fix unemployment at the expense of higher prices, or you stay put to tame prices but risk a recession.
For now, economists say the labor market is likely to remain the Fed’s central focus, potentially even shaping forecasts at the September FOMC meeting.
“The Fed opened the door to rate cuts, but the size of that opening is going to depend on whether labor-market weakness continues to look like a bigger risk than rising inflation,” said Ellen Zentner, chief economist at Morgan Stanley Wealth Management, in an interview with CNBC.
For Mohamed El-Erian, president of Queens’ College, Cambridge, and adviser to Allianz, the Fed’s biggest constraint is its own inflation framework. He argues the central bank’s 2% target may no longer be realistic in an economy undergoing deep supply-side shifts.
“Few seem willing to examine a question central to economic well-being,” El-Erian said, referring to whether the Fed should still treat 2% as the appropriate benchmark given current structural changes.
The latest data for the Federal Reserve's preferred inflation measure, core PCE, shows inflation at 2.8%.
undefined Mohamed A. El-Erian (@elerianm) July 31, 2025
Most reporting will note that inflation remains stubbornly above the Fed's 2% target, more than four years after its initial surge which peaked at 7% (9.1% for headline… pic.twitter.com/UBGTInFC8t
The result is a Fed caught between its mandate and its credibility, with Powell stuck trying to thread the needle between inflation fears, political pressure, and a cooling job market.
Your email address will not be published. Required fields are markedmarked