Although inflation exceeds the Fed’s 2% target, economists hope to cut interest rates this September to address the weakening of the labour market.
Powell shows possible Fed rate reductions in September
Federal Reserve Chairman Jerome Powell opened the door to interest rate cuts in September, claiming that “the negative side risk to employment is rising.”
After nine months of stabilizing key interest rates, the Federal Reserve is widely expected to announce interest rate cuts after a two-day meeting in September.
The central bank’s decision, announced on September 17, continues at a lower price by Jerome Powell, chairman of President Donald Trump’s Browbeebbeebbeebbeebbeebbeebbeebbeebbeebbeebbeebbeebbeebbeebbeebbeebbeebbeebbeebbeebbeebbeebbeebbeebbeebbeebbeebbeebbeebbeebbeebbeebbeebbeebbeebbeebbeebbeebbeebbeebbeebbeebbeebbeebbeebbeebbeebbeebbeebbeebbeebbeebbeebbeebbeebbeebbeebbeebbeebbeebbeebbeebbeebbeebbeebbeebbeebbeebbeebbeebbeebbeebbeebbeebbeebbeebbeebbeebbeebbeebbeebbeebbeebbeebbeebbeebbeebbeebbeebbeebbeebbeebbeebbeebbeebbeebbeebbeebbeebbeebbeebbeebbeebbeebbeebbeebbeebbeebbeebbeebbeebbeebbeebbeebbeebbeebbeebbeebbeebbeebbeebbeebbeebbeebbeebbeebbeebbeebbeebbeebbeebbeebbeebbeebbeebbeebbeebbeebbeebbeebbeebbeebbeebbeebbeebbeebbeebbeebbeebbeebbeebbeebbeebbeebbeebbeebbeebbeeb Calling Trump’s name couldn’t shake the Fed, but a series of disappointing job market reports may have been enough to ultimately do the trick.
“The fourth month of employment performance has marked a dramatic slowdown in employment, fully supporting the Fed’s launch rate reductions at the next meeting,” said Kathy Boss Jansick, the national chief economist, in a memo on September 5th.
The “real question now” is how many rate reductions will continue.
Why does the Fed want to cut interest rates?
The Fed is tasked with maintaining maximum employment and low inflation.
When the labor market is weak, reducing interest rates can reduce borrowing costs for businesses and consumers, juice the economy and promote employment. When consumer prices skyrocket, central banks will raise prices to cool economic activity and facilitate inflation.
The dilemma the Fed faces this year is that tariffs are both expected to curb growth and raise consumer prices, and the central bank has been torn between dual missions.
Why is the Fed expected to cut fees now?
The US economy added just 22,000 jobs in August as businesses tackle new trade, immigration and federal layoff policies, according to data from the Bureau of Labor Statistics. Unemployment rates rose to the highest level since October 2021, and the revision reveals that the US will cut 13,000 jobs in June, the first month of unemployment since December 2020.
The findings follow the unfortunate July report, revealing dramatic downward revisions for employment benefits in May and June. Powell signaled that the Fed was open to rate cuts shortly after the report was released.
Another report from the Bureau of Labor Statistics, issued on September 9, shows that previously estimated companies employed nearly 1 million workers in the 12-month period that ended in March than previously estimated, according to a memo from Sal Guatieri, senior economist at BMO Capital Markets.
But isn’t inflation still high?
Although inflation rates exceed the Fed’s 2% target, inflation numbers in August may not have been high enough to prevent the Fed from cutting.
According to the Labor Bureau, consumer prices accelerated modestly at 2.9% in August, while core inflation ruled out more volatile categories such as food and energy, but remained stable at 3.1%.
The rise in unemployed claims that “covers the importance of the inflation report,” and “emphasizes the labour market is losing steam and strengthens the need for the Fed to begin cutting rates,” Boss Jansik said in a recent memo, adding that September is likely to mark the start of a string of interest rate cuts.
Why is the Fed stable?
The Fed has been reluctant to cut fees since late 2024, opting instead for a “waiting” approach, analyzing how Trump’s tariffs affect consumer prices.
Powell in August said the impact of tariffs on prices is “now clearly visible,” but a “rational basic case” means it leads to one-off price bumps with relatively short-lived effects. Meanwhile, he warned that the risk of employment drawbacks is increasing.
“In the short term, the risks to inflation are leaning upside down and the risks to employment are challenging,” he said in a speech at Jackson Hole, Wyoming. “When our goals are so tense, our framework calls for a balance on both sides of our dual mission.”
Will the Fed cut interest rates in September?
Investors are betting on interest rate cuts this month. CME’s FedWatch tool suggests that as of Friday there is a 25 basis point reduction (0.25 percent points), and a 0.5 percent point cut of about 92% and 8% chance. The Fed’s main interest rates currently range from 4.25% to 4.5%.
Unless Fed officials believe the economy is heading into a recession without aggressive interest rate cuts in September, “the possibility of a 50 bp (base) cut in September could be off the table,” Raymond James chief economist Eugenio Aleman said in a memo.
According to a memo from JP Morgan economist Michael Felolli, some Fed officials may push for more aggressive cuts at their September meeting. Republican federal governors Christopher Waller and Michelle Bowman opposed the cuts in July, potentially opposed a 0.5 percent point cut. According to Ferroli, Stephen Milan, who appears to have been confirmed by the Senate before the meeting, could also oppose the bigger cuts.
“It also said that the region’s federal president or two “two” could vote without changing policy rates,” said Matthew Lutzetti, research economist at Deutsche Bank.
“This decision is unlikely to be unanimous,” Lutzetti said in a memo. “Depending on the outcome, it could be the first meeting since 1988 to challenge on both sides since September 2019.”
How many times will the Fed be cut this year?
Many economists expect a 0.25 percentage points cut in September, but it’s clear which cuts will continue.
The Fed fund futures market is betting on three interest rate cuts in 2025, but economists are split over whether they will announce two or three cuts this year.
Overall, the median respondents in the recent Bloomberg survey predicts two interest rate cuts by the end of the year, with economists splitting whether a second cut will occur in October or December. Over 40% of economists expect three.
Will Lisa cook attend the Fed meeting?
It remains to be seen whether federal Gov. Lisa Cook will play a role in the Central Bank’s September meeting.
A federal judge on September 9th ordered Cook to continue her work with the Fed as she fights Trump’s attempt to fire her in court despite the ruling being challenged.
The Trump administration has argued that Cook commits mortgage fraud before joining the Fed, allowing the president to fire cooks “for a cause.” Cook denied fraud and claims that dismissal is illegal.
Trump’s unprecedented move in Fire Cook – the first black woman on the Fed’s board – raised concerns about central bank independence from politics. Trump called for the Fed to make aggressive rate cuts, and in August he said he hopes the majority of its board’s appointees will soon cut interest rates.
Cook’s lawyer, Abbe Lowell, argued that firing Cook would “have a risk to the stability of our financial system.”
The Justice Department asked the Court of Appeals to suspend an order temporarily blocking the removal of Cook, requesting a decision by the end of the business day of September 15, just before the two-day Fed meeting began on September 16th.
Contributor, Burt Jansen
