Where is the economy going? Largely in an unknowing direction, but there are some interesting weathervanes on display.
The Fed Tries To Chart The Course
The Federal Reserve is in a difficult position, which makes taking action particularly difficult for them. The reason for the Fed’s tentative steps is its two primary and potentially clashing mandates — maximum sustainable employment and price stability. Put differently, the central bank is supposed to direct monetary policy, so inflation doesn’t race out of control, and the country doesn’t experience large bouts of joblessness.
Their central tool is setting the benchmark federal funds rate, the cost of one bank borrowing overnight from another without having to front collateral. The most common tradeoff is raising interest rates to slow the economy and reduce inflation or, if jobs seem in trouble, lowering interest rates to increase economic activity. At times like the present, when inflation is rising and the labor market is slowing, the dual mandates are sitting on a see-saw.
“Inflation has eased significantly from its highs of 2022 but remains somewhat elevated relative to our 2 percent longer-run goal,” said Fed Chair Jerome Powell in a speech on September 23. Personal Consumption Expenditures (PCE), the central bank’s preferred measure of inflation, rose to 2.7% year-over-year in August. That compared to 2.3% in August 2024. Core PCE, without the volatile categories of food and energy, rose 2.9% year-over-year, which is even worse and more concerning.
“Goods prices, after falling last year, are driving the pickup in inflation,” Powell said. “Incoming data and surveys suggest that those price increases largely reflect higher tariffs rather than broader price pressures.” The administration’s plans are finally settling in, hitting consumers where they can see the changes and feel them in their personal cost of living.
Inflation might keep rising. During the September meeting of the Federal Open Market Committee, during which the organization cut the interest rates, the central tendency projection of where inflation would be by the end of this year was between 2.9% and 3.0%. Core PCE inflation, between 3.0% and 3.2%. Not a disaster but heading in the wrong direction.
The Fed may have seen the quarter-point interest rate cut on September 17 as necessary because the labor market is flagging. Nevertheless, it is a dangerous move because it could potentially help heat up inflation. There’s already evidence that is happening, especially as the reaction to the tariffs has finally started to filter into the greater economy. Higher cuts would likely put upward pressure on inflation.
A Jolt Of Java
Starbucks is not sitting quietly with a latte or cup of tea. The company is worried. Public data pulled together by S&P Global Market Intelligence shows that while the brand making money, it’s a lot less than in the 12 months ending June 2025 — the fiscal year doesn’t close out until the end of this month — the 12 months ending June 29, 2025, had earnings per share of $2.32. Compare that to the $3.32 for the 12-month ending September 29, 2024, it was $3.32.
The total revenue was $36.7 billion ending August 2025 compared to $34.3 billion ending September 2024, a gain of 1.3%. But gross profit was down sharply, from $9.7 billion to $8.7 billion. Cost of goods was up sharply from $26.4 billion to $28.0 billion, a 6% increase.
The company plans to cut about 900 current non-retail positions and also “close many open positions,” so no hiring into those places.
Starbucks will also cut 1% of company-operated stores in North America, ending with about 18,300.
Revenues are fairly flat and costs of producing and selling coffee were up 6%. It smells like tariffs area settling in for the fall.