The Federal Reserve is planning to cut interest rates for the first time this Wednesday afternoon.
The decision, released at 2pm on ET, faces challenges on multiple fronts, from an unprecedented attack on its independence to anxious economies, with experts divising whether the cut is currently appropriate.
The labor market appears to be slowing dramatically. The August employment report showed that just 22,000 jobs were added, far below economists’ expectations. The report also showed that the US lost employment in June. So far, the economy has added 598,000 jobs in the first eight months of 2024, compared to 1.4 million. The unemployment rate rose last month to 4.3%, a level not seen since September 2017, except for the Covid-19 pandemic.
Lower rates help businesses hire because they are cheaper to take away loans, and lower consumer credit card fees.
At the same time, inflation is creeping up. Inflation has risen from 2.3% to 2.9% in August since April, when President Donald Trump announced so-called “mutual” tariffs. The Fed’s inflation target is 2%.
While central banks usually raise prices to push down inflation, signs of labour market cracking could potentially lean Fed officials towards reductions. The Fed’s primary rate is currently set between 4.25% and 4.50%.
“Due to the conflict between benefits inflation risk and negative employment risk, Chair Powell expects that policies are not on the preset course and will rely on data,” an economist at Morgan Stanley said Friday. They also said they hope that Powell will diagram the “gradual and careful” rate reduction course.
Goldman Sachs Economist agreed. “After the July and August employment reports and major negative preliminary benchmark revisions, employment growth is well below the rupture rate, and it appears that risks are still leaning towards further negative revisions.
The Fed’s top priority right now is to support the labor market, which they said will likely lead to a quarter-point cut.
If the Fed is cut on Wednesday, it could be the start of a series of subsequent cuts, with the market likely to have three-quarters of interest rates totaling three-quarter percentage points by the end of the year.
In recent interviews and revenue calls, companies have also flagged slow spending by a large portion of their population.
McDonald’s CEO Chris Kempchinski called it “a two-tier economy” in a CNBC interview earlier this month. High-income households continue to live freely, but “middle-income and low-income consumers, they feel under a lot of pressure right now.”
Several well-known economists are not convinced that a Fed cut is guaranteed at this point. Joseph Gagnon, a senior fellow at the Peterson Institute for International Economics, said last month that inflation remains above the federal 2% target, even before Trump’s tariffs. “Price pressure could rise in the coming months as businesses are forced to pass on higher tariff costs to protect profit margins,” he said.
The stock market is also thriving.
“It is not unprecedented for the Fed to ease when inventory is at or near the record high,” said US economist Michael Ferroli, JP Morgan Chase Chief. “If inventory gets high, inflation goes above target and changes higher, that’s rare.”
The Fed is also the first meeting with newly confirmed Gov. Stephen Milan, who remains chairman of the Economic Advisory Council under Trump.
Milan joins the Fed under extremely unusual circumstances. Members of independent central banks have historically not taken on other external roles during their tenure. Milan is currently on unpaid leave from the council and can return at the end of January when the Fed term ends. The administration tried to downplay the arrangement.
“I don’t think there’s anything irregular about that,” Scott Bescent said of CNBC on Tuesday.
“Everyone knows he’s coming back,” Bescent added, “I think the cards on the table are actually much more transparent.”
The Trump administration is looking to further influence on the Fed by attempting to fire Lisa Cook, the first black woman to work on the Governor’s Committee over allegations of mortgage fraud. Cook has not been charged with a crime. The Court of Appeals ruled that she cannot be removed while she sued the administration over her attempt to terminate her. For now, the cookie remains the same and I will vote for the Fed’s interest rate decision.
It all comes after months of attacks from Trump. In search of a lower fee, the president and others in his administration have hampered Powell with personal insults, saying the entire Fed should be “embarrassed” at their work.
