The news: Consumer prices in August rose at a faster pace than in July, while a weak jobs report showed rising unemployment, per the Bureau of Labor Statistics. This unsavory combination points to the Federal Reserve cutting interest rates at its September meeting next week.

Banking impacts: A potential rate cut from the Federal Reserve would be the first since December 2024.

• For banks, this could impact their profitability by narrowing the margin between what they pay out in interest on deposits and what they earn on loans.
• If this is the first of more rate cuts to come, it could help raise demand for lower mortgage and auto rates, which could compensate for the lower net interest income. It could also drive refinancing to help combat risks of loan defaults.

A weak labor market and rising inflation also signal a struggling economy, which we have predicted could decrease demand for loans and increase loan defaults for banks. A lower interest rate could help to combat these risks.

The retail perspective: August’s CPI report provided a clearer picture of how tariffs are impacting prices—and consequently consumer buying power.

• Grocery prices rose 0.6% MoM and 2.7% on an annual basis, with the largest increases felt in products with the greatest exposure to tariffs, like roasted coffee (up 21.7% YoY), steak (up 16.6%), and candy and chewing gum (up 8.1%).
• Inflation rates for categories with the greatest reliance on overseas production—including apparel, furniture, and appliances—also picked up during the quarter, a sign that companies are shifting some of the tariff burden onto consumers.

The weakening labor market isn’t helping matters. Real wage growth was negative in August, according to a separate report from the Bureau of Labor Statistics, adding to the financial strain that consumers are under.

What to expect next: For customers, this is a double-edged sword.

• On one hand, a rate cut could make borrowing more affordable, potentially lowering the cost of mortgages, auto loans, and credit card debt. This could be a much-needed reprieve for households facing rising prices for everyday goods.
• On the other hand, savers would lower the interest they earn on savings accounts and certificates of deposit, and banks trying to offer the most competitive rates will be risking higher deposit costs.

While lower rates might spur some demand for new loans, the primary impact will be a squeeze on banks’ profitability.