Fed poised to cut interest rates for first time under Trump

Investors expect that this will be the meeting where the central bank pivots, switching from keeping interest rates high to beginning the gradual process of loosening monetary policy. Powell will have to thread a careful needle with how the Fed starts to cut rates, because too much too soon could further ignite inflation, while too little too late could send the economy into a recession.

“He has a tough job, no doubt about it,” Heather Long, chief economist at Navy Federal Credit Union, told the Washington Examiner.

Backdrop

Trump and his allies have been aggressively agitating for lower interest rates for months. He has argued that the Fed and Powell are holding back the economy and that lower interest rates would help consumers.

To understand the Fed’s position, one needs to understand its dual mandate. The Fed’s central mission is to balance the need for price stability while pushing for full employment.

For years, the Fed has been working to stifle inflation, which exploded under former President Joe Biden and has since remained too high. The Fed’s goal is 2% long-run inflation, which is considered healthy price growth.

But now, there are signs that the labor market is weakening. Job numbers from past months have been revised down, raising concerns about an economic slowdown. There are increasing fears of a recession, which would be a worst-case scenario for the Fed, Trump, and Republicans heading into the midterm election season.

Inflation

Crucially, despite expectations for an interest rate cut, inflation is still too high.

Inflation, tracked by the consumer price index, rose to 2.9% in August. The producer price index report showed that annual inflation unexpectedly fell seven-tenths of a percentage point to 2.6% for the year ending in August.

The Fed’s preferred gauge of inflation held steady at 2.6% for the year ending July, the most recent reading.

Some might think that the Fed cutting rates right now could cause inflation to go back up, but Mark Hamrick, senior economic analyst at Bankrate, said that even with the expected 0.25% interest rate cut, rates would still be considered elevated.

“We should be mindful that rates would still be restrictive with even this modest easing,” Hamrick told the Washington Examiner. “So it’s not as if they’re removing all restriction, they’re just simply removing some.”

Jeffrey Roach, chief economist for LPL Financial, also pointed out that there are still lingering concerns about how the tariffs might affect the inflationary calculus.

Trump’s tariff agenda has been one of the most aggressive in modern history, and while some argue that they will represent a one-time price adjustment, others fear more lasting effects. Powell said that the Fed is monitoring the tariff situation.

Jobs

While Trump has vociferously pushed for lower interest rates, the Fed operates independently of the White House, and driving the speculation of a rate cut at this meeting has to do with the labor market, not the president.

Over the past several weeks, a series of data has shown that the jobs market is notably weaker than previously reported.

The economy added just 22,000 jobs in August, and the unemployment rate rose to 4.3%. Also, the July jobs report revealed that some 258,000 fewer jobs were added in May and June than previously reported. 

Additionally, the government announced that labor market growth for the 12 months ending in March was 911,000 jobs less than previously reported.

Also, consumer sentiment fell to the lowest level since May this month, according to a preliminary reading of the University of Michigan Consumer Sentiment Index released last Friday.

“This is a slowing economy,” Long said. “I’ve been calling it a slow-speed economy right now, and the concern is that slow speed turns to stall speed. The labor market has been frozen for months with almost no hiring outside of healthcare and AI.”

Interest rates

The Fed’s current interest rate target is between 4.25% to 4.50%. Most Fed watchers predict that the likely rate cut will be by 0.25%, the typical size of rate revisions. While that will be welcome news for those pushing for lower rates, Trump has advocated for much deeper cuts.

Investors put the odds of a quarter-percentage-point cut at about 96% and an even bigger half-percentage-point revision at 4%.

But some other key insights into the FOMC’s thinking will be revealed after the conclusion of the meeting on Wednesday. Namely, what is known as the “dot plot.” The dot plot is a visual survey that shows where each member thinks interest rates should be in the coming months and years.

“I think that there’s a high likelihood that that they’ll say that it may well be prudent to cut rates further, but they will take that as a meeting-by-meeting issue,” Hamrick said.

Powell’s post-decision press conference will also be closely watched. During the meeting, he will field questions from the press for about an hour. His responses have the ability to move markets.

Intrigue

The intrigue surrounding this meeting makes it even more closely watched. Trump has long pushed for lower interest rates, so his reaction to the meeting is hotly anticipated.

Also, new Fed governor Stephen Miran will be part of the FOMC decision after being confirmed by the Senate along party lines just hours before the two-day meeting began. He is replacing Fed governor Adriana Kugler, who unexpectedly stepped aside last month. Her term ended in January, and Miran is set to serve out the remainder of her term.

Democrats and some Fed experts have criticized Miran for only opting to take an unpaid leave of absence and not resigning from his job as chairman of the White House Council of Economic Advisers.

Trump has also attempted to fire another sitting Fed governor, Lisa Cook. Trump announced his plan to fire and replace her after Federal Housing Finance Agency Director Bill Pulte accused her of mortgage fraud, but Cook filed a lawsuit and a judge recently issued a temporary restraining order blocking the move.

Trump’s opponents say the accusations are a pretext to fire a monetary policy committee member and put in a replacement who is more amenable to cutting interest rates and supporting the president’s goals.

FED RATE CUTS COULD BRING HOUSING RELIEF SOUGHT BY TRUMP

Fed independence has increasingly become a focus, and Roach predicted that Powell might face questions about it during his press conference.

“Fed independence, that topic might come up in the press conference, and I think Powell is going to keep that short and sweet,” Roach told the Washington Examiner. “He’s going to say, I’m not influenced by politics, end of discussion.”