It's finally happening. After months of economic debate and growing attacks from US President Donald Trump, the Federal Reserve is poised to cut interest rates on Wednesday.
The Federal Reserve is broadly anticipated to announce it is cutting the target for its primary interest rate by 0.25 percentage points. That will put it in a range of 4% to 4.25%—the lowest level in over a year and a half.
This decision—the initial reduction by the Fed since last December—is anticipated to kick off a series of additional cuts in the coming months, which should help bring down borrowing costs across the US.
A Warning Regarding the Economy
But they carry a warning about the economic situation, reflecting growing agreement at the Fed that a stalling job market needs a stimulus in the shape of lower borrowing costs.
Nor are they expected to satisfy the president, who has demanded far deeper reductions.
Why the Cut Is No Surprise
To a large extent, it is expected that the Fed, which sets interest rate policy independent of the White House, is cutting.
Price increases that ripped through the recovery phase and prompted the bank to raise borrowing costs in 2022 has decreased significantly.
In the UK, the EU, Canada and elsewhere, central banks have already acted with reduced rates, while the Fed's own policymakers have said for months that they anticipated to lower interest rates by at least 0.5% this year.
During the previous gathering, two members of the board even supported a reduction.
Their proposal was rejected, as remaining officials remained worried that the administration’s fiscal measures, including tax cuts, tariffs and mass detentions of migrant workers, might lead to inflation to rise again.
Indeed, the US in recent months has seen inflation increase slightly. Consumer costs increased 2.9% over the year to August, the quickest rate since January, and remain higher than the Fed's 2% target.
Job Market Softness Eclipses Price Worries
But in recent weeks, those apprehensions have been overshadowed by weakness in the labour market. The US reported meagre job gains in August and July and an net decline in early summer—the first such decline since 2020.
The key factor is the developments in the employment arena—the weakening that we've seen over the recent period.
The Fed knows that when the job sector turns, it turns very quickly, so they're wanting to make sure they're not slowing down the economy at the same time the employment landscape has begun to soften.
Political Pressure and Central Bank Autonomy
Though Trump has dismissed worries about economic weakness, the rate cut is unlikely to be unwelcome to him—he has spent months criticizing the Fed's hesitance to reduce borrowing costs, which he claims should be as low as one percent.
On social media, he has called Federal Reserve chairman Jerome Powell a real dummy, accusing him of holding back the economic growth by leaving borrowing costs elevated for an extended period.
Trump's pressure is not only rhetorical. He acted promptly to appoint the chairman of his Council of Economic Advisers on the Fed ahead of this week's meeting after a temporary opening opened up recently.
His administration has also threatened Powell with firing and investigation and is engaged in a court dispute over its attempt to fire another member of the board.
Observers Warn Over Central Bank Autonomy
To critics, Trump's moves amount to an assault on the Fed's autonomy that is unprecedented in modern times.
But whatever awkwardness in the air at this week's Fed meeting, analysts say they believe the Fed's decision to reduce rates would have occurred regardless of his campaign.
Administration measures are definitely generating the economic activity that is forcing the hand the Fed.
Public criticism of the Fed to lower rates in my view has had no effect at all.
