Fed to announce rate cut
Having kept its benchmark interest rate steady for a ninth month in a row, the Federal Reserve is now virtually certain to announce a rate cut at the end of its September 17 meeting. The action follows a few months of subpar employment reports, which economists note have weakened the labor market and left the central bank with little choice but to respond.
President Donald Trump has repeatedly encouraged Fed Chair Jerome Powell to reduce rates on several occasions with insults and public criticism. But economists believe it was not the words of the president that were most influential—it was the fourth straight month of sluggish job growth.
Nationwide Chief Economist Kathy Bostjancic summed it up in a recent note: “The fourth month of sub-par employment performance signals a dramatic stall in hiring and fully supports the Fed starting rate cuts at the next meeting.”
Why the Fed outs or raises rates
The Fed has two main tasks: low inflation and encouraging maximum employment. Its interest rate moves are at the heart of accomplishing those goals.
When interest rates are reduced, it is less expensive to borrow. Businesses are able to borrow in order to expand and hire more workers, and families will spend more freely on houses, cars, and other big-ticket items. That increased activity can spur a flagging job market.
And when inflation rises too quickly, the Fed will hike rates to slow down demand and curb price increases.
This year, however, the Fed was faced with a different issue. Tariffs imposed by the Trump administration have imposed costs on consumers and businesses alike and have placed a brake on growth. That has left the central bank caught in the crossfire between the risks of inflation and softening jobs.
The August jobs report only added 22,000 jobs—far below expectations. The unemployment rate also rose to its highest in months since late 2021. Revisions indicated that the U.S. economy actually lost jobs last June, the first loss in over four years.
July’s job report was also disappointing, with significant downward revisions to months past. More recently, an update from the Bureau of Labor Statistics revealed that nearly one million fewer workers were added to the economy in the last year than previously estimated.
BMO Capital Markets senior economist Sal Guatieri said that the revisions “give the Fed yet another reason to cut rates.”
Inflation is still high, but jobs take priority
Inflation has been running above the Fed’s 2% target, but August’s numbers likely weren’t strong enough to keep the central bank from tightening policy. Consumer prices rose at a 2.9% rate, and core inflation, excluding food and energy, held at 3.1%.
Bostjancic argued that a rise in jobless claims overshadows the problem of inflation and stated September’s rate reduction is “likely the beginning of a series.”
Will the Fed go little or big?
Investors appear to be convinced a cut is coming. In CME’s FedWatch tool, there is about a 96% chance of a quarter-point cut and a low possibility of a half-point move. The Fed’s benchmark rate is now between 4.25% and 4.5%.
Even so, some economists think that dissent is likely to occur within the Fed. Some officials might be in favor of a larger cut, while others will want to make no change at all. In that case, the vote will be one of the most fragmented since 1988.
How many cuts ahead?
Markets are anticipating three rate reductions in 2025, though economists are split. A Bloomberg poll showed that the majority of forecasters anticipate two cuts before the end of the year, while over 40% anticipate three. The second cut appears uncertain as to when, either October or December.
Political pressure in the background
The Fed’s independence has been questioned after Trump tried to remove Fed Governor Lisa Cook, the first Black woman to be seated on the board. A court of appeals recently decided that Cook can remain, at least for now.
As the political soap opera unfolds, Powell and his fellow policymakers are looking at the economic statistics. And with the labor market softening, chances are it will be September that sees the start of a new cycle of cuts in interest rates.
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