The Federal Reserve is expected to announce the first interest rate cut of the year. Wednesday’s announcement comes at a time when inflation is rising from tariffs, and the labor market is showing signs of stagflation.
It also comes amid consistent pushing from President Donald Trump to Fed Chair Jerome Powell to cut rates.
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Interest rate cut
The Fed is expected to cut rates by 0.25% according to CME FedWatch. They look at 30-day Fed Funds futures prices to determine that number.
“The Fed does not defy the markets,” Danielle DiMartino Booth, former Fed insider and CEO of QI Research, told Straight Arrow News. “It does not like to surprise markets, and markets have fully priced in that quarter-point rate cut.”
The Fed operates with a dual mandate to keep inflation down while keeping employment up.
That can make things difficult for the Fed because rising inflation would require them to boost interest rates, which usually means less spending. But the best way to fight unemployment is to cut rates, making it cheaper for businesses to expand and hire.
“It’s definitely critical to the [Federal Open Market Committee] moving forward with plans to cut rates in the first place, leaning more towards their dual mandate on the labor side of the dual mandate, as opposed to the inflation side,” Booth said. “However, Powell will be very vocal and attentive to the risks that inflation remains well above the Fed’s 2% target.”
Labor market
The latest jobs report showed another sign the economy is slowing, with the U.S. adding just 22,000 jobs in the month of August.
Unemployment also rose 0.1%
“Jerome Powell will not try to fight that data, because it is unequivocal in flashing that the pandemic notwithstanding June of 2025 saw job losses for the first time since September 2010,” Booth said. “There’s no escaping the first job loss in real-time data.”
Inflation
The personal consumption expenditures index, or PCE, has continued to trend away from the Fed’s 2% target, now sitting closer to 2.6%.
The congressional budget chief and other market analysts point to the president’s ongoing tariffs and trade wars as the key push for higher inflation.
“If they lower rates this time, inflation reignites, it’s going to be even harder to break the back again because higher inflation expectations started getting entrenched in the economy,” Mark Higgins, Senior Vice President at Index Fund Advisers, told Straight Arrow News.
Another common inflation metric, the consumer price index, also rose last month.
“Powell will be very vocal and attentive to the risks that that inflation remains well above the Fed’s 2% target, and we’re still not sure what the full effects are going to be in terms of price pass through to consumer prices until we truly have the dust settled, which we don’t have just yet,” Booth said. “Therefore, he will not pre-commit to any sort of a set rate cut schedule.”
Trump and the Fed
Trump has made it very clear he’s unhappy with Powell and the Fed’s decisions not to cut rates so far this year.
Powell has repeatedly said the president’s tariffs have made the Fed more cautious on rate cuts.
“You have a situation where the Fed’s credibility is impaired,” Higgins said. “You have a president that is clearly willing to exert as much influence as possible on the Fed to lower rates.”
Higgins pointed to The Great Inflation period of the 1970s, which ended with a recession. Former Fed Chair Paul Volcker made certain decisions, including sharply raising interest rates to rein in inflation in 1979, leading to that recession.
“It was so severe because it had gone on so long that by the time you break it, you really have to cause significant pain,” Higgins said. “And I think if the Fed had just taken the pain, or, force the American people to take the pain a year ago, it would have been less severe than it’s going to need to be.”
