Opinions are split inside the Federal Reserve on how urgently the central bank should loosen financial conditions further after last week’s rate cut. A reacceleration in growth, stubborn inflation, and cracks in the labor market have combined to paint a conflicting picture of the US economic outlook. Facing these macro crosscurrents and tariff uncertainty, Fed officials are debating their next steps. In a speech on Tuesday, Fed Chair Jay Powell warned that “two-sided risks mean that there is no risk-free path,” saying the prospect of higher inflation and unemployment create a “challenging situation.” Fed Governor Michelle Bowman offered a more emphatic assessment earlier in the day, as she called on her colleagues to “act decisively and proactively” amid “emerging signs of fragility.” Recent data, including downward revisions to jobs growth, “show that we are at serious risk of already being behind the curve,” Bowman added.

Even as hiring has pumped the brakes, the US economy has shown signs of regaining some momentum through the summer after a sluggish start to the year, buoyed by a flood of AI-driven business investments and resilient consumer spending. Private fixed investment in information processing equipment grew 20.4% year-over-year in the second quarter, and retail sales increased 0.6% on a monthly basis in both July and August, Commerce Department data showed. The agency’s final GDP reading for the second quarter revealed that US growth was stronger than previously estimated at 3.8%, up from 3.3%. Third-quarter growth was on track to hit 3.3%, according to the latest update to the Atlanta Fed’s GDPNow model on Sept. 17.

In a new Weekly View from the Desk, PGIM’s fixed income team considers an “overheating” risk for the US economy, market reaction to an evolving rate outlook, and how the Fed’s reaction function could change under a new chair next year.