The Federal Reserve is expected to cut interest rates for the first time this year Wednesday afternoon.
The decision, which will be announced at 2 p.m. ET, comes as the central bank faces challenges on multiple fronts, from unprecedented attacks on its independence to an uneasy economy, with experts split on whether a cut is even appropriate right now.
The labor market appears to be slowing dramatically. August’s jobs report showed that just 22,000 jobs were added, far below the expectations of economists. That report also showed that the U.S. lost jobs in June. So far this year, the economy has added 598,000 jobs, compared with 1.4 million for the first eight months of 2024. The unemployment rate also ticked higher last month to 4.3%, a level not seen since September 2017 outside of the Covid-19 pandemic.
Lower rates could help businesses hire as it becomes less expensive to take out loans, and credit card rates fall for consumers.
At the same time, inflation has been creeping up. Since April, when President Donald Trump announced his sweeping so-called “reciprocal” tariffs, inflation has increased from 2.3% to 2.9% in August. The Fed’s inflation target is 2%.
Typically, a central bank would raise rates to push inflation down, but signs of cracks in the labor market could cause Fed officials to lean toward cutting rates. The Fed’s primary rate is currently set at 4.25% to 4.50%.
“With the conflict between inflation risks on the upside and employment risks on the downside, we expect Chair Powell repeats that policy is not on a preset course and is data dependent,” economists at Morgan Stanley said on Friday. They also said they expect Powell will chart a course for “gradual, cautious” rate cuts.
Goldman Sachs economists agreed. “After weak July and August employment reports and a large negative preliminary benchmark revision, job growth now appears to be much lower and below the breakeven rate, the risks still tilt toward further negative revisions, the unemployment rate has risen slightly for two months in a row, and our broader measure of labor market slack has risen a bit more,” they wrote.
The Fed’s top priority now is supporting the labor market, which will likely translate to a quarter-point cut, they said.
If the Fed follows through on cutting rates Wednesday, it could be the beginning of a series of subsequent cuts, with markets pricing in a high likelihood of three interest rates for a total of three-quarters of a percentage point by the end of the year.
In recent interviews and earnings calls, companies have also flagged slower spending by a large chunk of the population.
McDonald’s CEO Chris Kempczinski called it a “two-tier economy” in a CNBC interview earlier this month. While upper income households are continuing to spend freely, “middle- and lower-income consumers, they’re feeling under a lot of pressure right now.”
Several prominent economists aren’t convinced a Fed cut is warranted at this point. Joseph Gagnon, a senior fellow at the Peterson Institute for International Economics, noted last month that inflation was still lingering above the Fed’s 2% target even before Trump’s tariffs. “Price pressures are likely to pick up in coming months as businesses are forced to pass on higher tariff costs to protect their profit margins,” he said.
Stock markets are thriving, too.
“It’s not unprecedented for the Fed to ease when stocks are at or near all-time highs,” JPMorgan Chase chief U.S. economist Michael Feroli said in early August. “It’s rarer when stocks are at the highs and inflation is above target and inflecting higher.”
This Fed meeting is also the first with newly confirmed governor Stephen Miran, who remains chairman of the Council of Economic Advisers under Trump.
Miran joins the Fed under highly unusual circumstances. Members of the independent central bank historically have not held other outside roles during their tenure. Miran is currently on unpaid leave from the council and could return when his Fed term concludes at the end of January. The administration has sought to downplay the arrangement.
“I don’t think there’s anything irregular about it at all,” Treasury Secretary Scott Bessent said Tuesday on CNBC.
“Everyone knows that he’s going back” to the White House, “so I think cards on the table it’s actually much more transparent,” Bessent added.
The Trump administration has sought to further increase its influence on the Fed by attempting to fire Lisa Cook, the first Black woman to work on the board of governors, over allegations of mortgage fraud. Cook has not been charged with a crime. An appeals court has ruled she cannot be removed while she sues the administration over its attempt to terminate her. For now, Cook remains in place and will vote on the Fed’s interest rate decision.
It all comes after months of attacks from Trump. Seeking lower rates, the president and others in his administration have hammered Powell with personal insults and have said the entire Fed board should be “ashamed” of their work.