Fed expected to cut rates this week as divisions grow amid heavy Trump pressure

NEW YORK – The Federal Reserve is poised to resume cutting interest rates for the first time in nine months as it grapples with a slowing labour market, stubborn inflation and an unprecedented push by US President Donald Trump for lower borrowing costs.

A cut this week, however, will not necessarily set the Fed on a smooth glide path to lower rates.

A string of disappointing data is fanning worries that the US labour market could tip into a more serious slowdown, and drag with it consumer spending and economic growth. But inflation is still above the Fed’s 2 per cent target and could yet be driven higher by tariffs. That is making some policymakers wary of moving too fast.

Typically, an initial move like the one expected on Sept 17 marks the beginning of a rate-cutting or rate-hiking cycle, said Mr Pat Harker, who served as president of the Philadelphia Fed until June.

This time, “it’s not obvious that’s going to happen here in a robust way”, he said.

Divisions among Fed officials over what to do next could result in multiple dissents, with some favouring no rate cut and others calling for a larger move. It could mark the first Fed meeting since 2019 with three dissents, or even the first since 1990 with four.

Policymakers are juggling the increasingly high-stakes moment for the US economy as they confront heightened pressure from a White House seeking more influence over the central bank.

Mr Trump, who has been putting pressure for months on Fed chair Jerome Powell to cut rates and repeatedly called on him to resign, predicted a “big cut” this week.

“I think you have a big cut,” Mr Trump told reporters on Sept 14 on his way back to Washington. “It’s perfect for cutting.”

Mr Trump in August attempted to fire Fed governor Lisa Cook, a move that has been temporarily blocked in the courts.

He also named a close ally to the central bank’s Board of Governors who, if confirmed by the Senate in time, could participate in this week’s meeting.

Jobs v inflation 

Bets on a quarter-point rate cut this week have been bolstered by two consecutive disappointing jobs reports, a rise in filings for unemployment benefits and preliminary data revisions that showed far less robust employment growth in 2024 and early 2025 than previously reported.

The Fed’s assessment of the labour market is complicated by what Mr Powell has called a “curious kind of balance”.

While demand for labour is softening, supply is also disappearing amid the Trump administration’s immigration crackdown – making it difficult to tease out just how weak the underlying jobs market really is.

A rate cut this week would nonetheless pull policymakers off the sidelines, where they have been all year. Officials have kept rates in a range of 4.25 per cent to 4.5 per cent, largely out of concern that Mr Trump’s sweeping imposition of tariffs on US trading partners could drive persistent inflation.

“I see weakness in the employment data that they’ve got to respond to,” said Mr Vincent Reinhart, chief economist of BNY Investments, who anticipates a cut at the coming meeting, but currently sees no need for continuous reductions after that. “We’re not at a break-glass moment.”

Tariff pass-through

Pass-through from the tariffs to consumer prices has started to show up, but has been limited as many companies absorb at least part of the duties for now.

Mr Powell has acknowledged the impact of tariffs on prices may ultimately prove short-lived, but has warned that officials must guard against the opposite possibility.

Some officials have also been troubled by price increases in services, which are not directly affected by tariffs.

“The trade shock and the immigration shock are two shocks that are making it very difficult for them to manage their dual-mandate goals,” said Mr Marc Giannoni, chief US economist at Barclays Capital and former research director at the Dallas Fed. “And so the direction of policy is not clear.”

Following the most recent employment report, Barclays economists upped their forecast for the number of rate cuts in 2025 and now expect the Fed to cut at each of its three remaining meetings in the year, followed by two cuts in 2026 – in March and June.

“We don’t think they want to go faster than that, or with deeper cuts than that, because of the price side of the mandate,” Mr Giannoni said.

Meanwhile, current and coming openings on the Fed’s Board of Governors mean more proponents of lower rates will likely join the central bank over the next weeks and months.

Mr Stephen Miran, Mr Trump’s pick to fill an open seat on the board, has echoed the President’s calls for the Fed to lower rates.

Senate Republicans plan to vote to confirm him on Sept 15.

If successful, the President’s move to fire Ms Cook would give him another slot to fill.

He will also have a chance to name a new Fed chief when Mr Powell’s term as chair expires in May 2026. The administration is weighing several candidates.

Rate projections

Analysts will closely parse the Fed’s new rate projections, which will show how they are taking the shifting economic landscape on board. They last updated their projections in June.

Those will be released alongside the post-meeting statement on Sept 17 at 2pm in Washington. Mr Powell will hold a press conference 30 minutes later.

Some economists say fears of a slowdown will turn a corner in the coming months as government tax cuts and the impact of Fed rate cuts begin to flow through to households and businesses.

The worst of the trade shock should also be over, provided tariffs stabilise, according to economists at Wells Fargo.

“We feel more optimistic about the outlook for economic growth,” they wrote in a Sept 10 note.

Fed governors Christopher Waller and Michelle Bowman, who dissented when their colleagues left rates unchanged in July, have downplayed worries over tariff-induced inflation, while emphasising growing labour market concerns.

Mr Waller – one of Mr Trump’s top contenders in the race for Fed chair – has said officials do not need to be locked into a sequence of steps, but that he favours multiple cuts in the coming months.

Other officials have signalled more caution. St Louis Fed president Alberto Musalem said in September that it is important to take a “balanced approach” to policy right now and not put too much weight on supporting the labour market or fighting inflation.

Atlanta Fed president Raphael Bostic said earlier in September that he continues to see one cut as appropriate for 2025, and Kansas City Fed president Jeff Schmid signalled an opposition in late August to any cuts for now – though each spoke before September’s weak jobs report. BLOOMBERG