A stronger-than-expected August services report, with the prices gauge at its highest since 2022, has trimmed the market's conviction that the Federal Reserve will ease policy at its September meeting.
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Hot ISM Services Print Cools Fed Bets on September Rate Cut
The August ISM services gauge rose to 55.4, beating the 54.3 consensus, as business activity hit a near four-year high and prices re-accelerated, cooling bets on a September Fed rate cut.
Business activity and new orders at multiyear highs "could signal a shift to increased employment in the services sector," Steve Miller, chair of the ISM Services Business Survey Committee, said in the report released Thursday.
The Business Activity Index climbed 2.6 points to 61.7, its strongest since November 2022, while new orders rose 3.7 points to 60.9, the highest since February 2023. The Prices Index advanced 2.3 points to 72.6, the steepest since August 2022 and above the 70 threshold for the fifth time in six months. Employment contracted for a second month at 47.8, though the share of companies cutting staff eased to 17.1 percent from 19 percent.
The mix complicates the Federal Reserve's path as it weighs easing from a fed funds target of 3.50%-3.75%, where Chair Kevin Warsh and colleagues held rates at their July 29 meeting. Strong demand and sticky prices argue for patience, yet the soft employment gauge and a 30-year mortgage rate that construction respondents put at 6.67 percent point to strain in rate-sensitive corners of the economy.
The 55.4 reading marks the 26th straight month of services expansion and sits 1.7 points above the 12-month average of 53.7, with the report mapping to annualized real GDP growth of about 2.3 percent. Twelve of 17 industries reported growth, led by mining, real estate and accommodation and food services, while finance and insurance and health care contracted. Respondents again flagged tariffs and the Middle East conflict as the top supply-chain concerns, with petroleum-linked costs rising for a seventh month and graphics processing units and steel added to the short-supply list.
For the Fed, the inflation signal is the sticking point. The Prices Index has now exceeded 60 percent for 21 straight months, and its 12-month average of 68.5 percent is the highest since April 2023. That persistence, alongside a new-orders surge that suggests demand can absorb further cost pass-through, reduces the urgency for the easing that markets had been pricing. The last time the services prices gauge ran this hot, in mid-2022, the Fed was still tightening, ultimately lifting the fed funds rate above 5 percent before the easing cycle that began in September 2024.
The employment picture offers the counterweight. With the services jobs gauge below 50 percent in 13 of the past 18 months, a labor market that has cooled unevenly could still push the Federal Open Market Committee toward a cut at its next meeting, even if Thursday's data argues for a slower cadence. Warsh has called interest-rate policy the Fed's primary instrument, and the committee's September decision will hinge on whether resilient demand or the soft hiring trend carries more weight in the weeks ahead. For households, the stakes are direct: a hold keeps mortgage costs near the 6.67 percent level that construction respondents said is already pushing buyers back to the sidelines, while a cut would ease that pressure even as it risks feeding the price gains the services report keeps clocking.
This article is for informational purposes only and does not constitute investment advice.
[1] US August ISM Non-Manufacturing Index 55.4, Expected 54.3, Previous 54.1[2] ISM services PMI strengthens past consensus in August[3] Strong demand boosts US services sector activity in August[4] Services PMI® at 55.4%; August 2026 ISM® Services PMI® Report[5] The Fed’s Influence Over Interest Rates Is Weakening – As It Should
