Fed Expected to Announce First Interest Rate Cut Amidst Political Pressure
The Federal Reserve is widely anticipated to announce its first interest rate cut in nine months on September 17th, potentially initiating a series of reductions to lower borrowing rates for businesses and consumers. This decision arrives as President Donald Trump exerts increasing influence over the central bank, raising concerns about its independence.
Anticipated Rate Cut and Economic Context
Economists and investors are forecasting a quarter percentage point cut, spurred by reports indicating a weakening labor market. Surveys project the possibility of one or two additional rate cuts in 2025. The Fed began hiking interest rates in 2022 to curb rapid inflation, which peaked at 9.1% in June of that year. Rates subsequently rose from near 0% to a two-decade high of 5.25% to 5.5% by July 2023. Trimming of rates began in 2024 as inflation cooled, but have been held steady so far, as officials waited to see how Trump’s tariffs would impact consumer prices.
Trump's Influence on the Federal Reserve
President Trump has been actively seeking to reshape the Federal Reserve’s leadership. He moved to replace Fed Governor Lisa Cook in August and swiftly pushed nominee Stephen Miran onto the board. Trump stated on Truth Social on September 15th, that Fed Chair Jerome Powell “MUST CUT INTEREST RATES, NOW, AND BIGGER THAN HE HAD IN MIND.” This action has stoked concerns about the Fed’s independence from political pressures and influence.
Key Indicators and Economic Projections
The Fed is set to release its quarterly dot plot, outlining officials' expectations for future interest rate movements. Nationwide Chief Economist Kathy Bostjancic notes that these estimates "will be closely scrutinized" to ascertain if the median interest rate still forecasts two quarter-point cuts by year's end. A Bloomberg survey reveals economists are divided on whether the Fed will cut rates two or three times this year. Moreover, the Fed could revise its 2026 projections, potentially doubling the previously projected 25 basis points cut to a total of 50 basis points.
Potential Dissent and Unanimity
While most economists expect a quarter-point reduction in September, some Fed officials might advocate for a more aggressive rate cut. Governors Christopher Waller and Michelle Bowman, along with newly appointed Stephen Miran, could dissent in favor of a half percentage point cut, according to economist Michael Feroli of JP Morgan. Some regional Fed presidents might also vote for steady rates. Deutsche Bank Research economists suggest the decision may not be unanimous. This meeting could potentially be the first with three dissenting governors since 1988.
Weakening Labor Market and Inflation
The U.S. economy added a disappointing 22,000 jobs in August, as per the Bureau of Labor Statistics. The unemployment rate reached 4.3%, its highest level since October 2021. Additionally, revisions indicate the economy shed 13,000 jobs in June, the first month of job losses since December 2020. Consumer prices moderately accelerated in August at 2.9%, according to the Labor Department, while core inflation remained steady at 3.1%. Although inflation has cooled considerably from its 2022 peak of 9.1%, it remains above the Fed’s 2% target.
Market Reaction and Economic Challenges
Wall Street's main indexes opened cautiously on September 17th ahead of the Fed's highly anticipated decision. Recent reports suggest the labor market is weakening, while inflation persists above the Fed’s 2% target. Tariffs pose a challenge to the Fed by potentially increasing consumer prices and curbing growth, leaving the Fed with competing goals of supporting stable prices and maximum employment. Recent economic data "pushes the FOMC (Federal Open Market Committee) into an uncomfortable position,” according to Scott Anderson, BMO Capital Markets’ chief U.S. economist.
Legal Challenges and Political Dynamics
An appeals court ruled that Fed Governor Lisa Cook can continue her duties despite President Trump's efforts to remove her. The Trump administration alleges that Cook committed mortgage fraud, a claim she denies. The Senate confirmed President Trump's pick, Stephen Miran, to the Fed's board of governors just before the rate decision meeting. Miran’s appointment has amplified concerns about the Fed's independence from politics. Trump has consistently called for aggressive rate cuts and expressed his expectation of having a majority of his appointees on the board to lower interest rates.
Potential Scenarios and Forecasts
The CME FedWatch tool indicates a 94% chance of a quarter percentage point cut in September and a 6% chance of a half percentage point cut. Fed funds futures markets are pricing in three rate cuts total this year. BMO Capital Markets deputy chief economist Michael Gregory expects Miran to call for at least a half percentage point cut. The benchmark federal funds rate has remained unchanged at 4.25% to 4.5% since December.
The Fed's Objectives
The Fed adjusts interest rates to support stable prices and maximum employment. Raising rates aims to cool economic activity during high inflation, while cutting rates can stimulate growth and hiring when the labor market is weak.
Powell's Press Conference and the Future
Federal Reserve Chair Jerome Powell is expected to hold a news conference on Wednesday, Sept. 17 at 2:30 p.m. EDT, following the Fed's decision. With Cook and Miran in place, the Fed’s meeting could be unusually contentious. The White House has indicated it will appeal Cook’s case to the Supreme Court. The Fed is widely expected to cut its key rate by a quarter point to about 4.1%, its first reduction since last December.
