In a widely anticipated move, the US Federal Reserve is poised to announce its first interest rate cut of 2025 this week. But behind the scenes, the central bank’s policy-making body, the Federal Open Market Committee (FOMC), is grappling with a deep internal divide. The expected rate cut, likely a 25 basis point reduction, is seen by many on Wall Street as a necessary step to support a slowing labour market. However, stubborn inflation and growing political pressure are complicating the Fed’s path forward.
The decision to cut rates comes amid a set of conflicting economic signals. Recent data has painted a worrying picture of the US labour market, with a sharp slowdown in hiring. The August jobs report showed just 22,000 new positions added, significantly below forecasts, while revisions to previous months’ data further underscored a weakening trend. This slowdown provides a strong argument for lowering borrowing costs to stimulate economic activity and hiring.
However, the inflation picture is less clear. Prices remain stubbornly above the Fed’s 2% target, partly fuelled by the Trump administration’s tariffs on imported goods. The annual inflation rate rose to 2.9% in August, the highest reading in seven months, according to government data. Some Fed officials worry that cutting rates now could reignite inflationary pressures, undoing the progress made in recent years. This dilemma pits the Fed’s dual mandate of price stability and maximum employment against itself.
The policy meeting is expected to reveal significant divisions within the FOMC. While a consensus for a 25 basis point cut has formed, the voting could be far from unanimous. Notably, some officials, including Governors Christopher Waller and Michelle Bowman, who dissented at the last meeting by voting for a rate cut, might now push for a more aggressive 50 basis point reduction. This would be in line with the repeated calls from the White House for more rapid and substantial easing.
Conversely, others, like Kansas City Fed President Jeffrey Schmid, may dissent in the opposite direction, arguing to keep rates unchanged to focus on curbing inflation. This potential for a three-way split in the vote—with some members wanting a bigger cut, some a smaller one, and others no cut at all—highlights the deep divisions facing Chairman Jerome Powell and his colleagues. The outcome of the vote, and the accompanying statement and economic projections, will be scrutinised for any clues about the future pace of cuts.
For investors, the key question isn’t just whether the Fed will cut rates, but how many more cuts will follow. Markets have already priced in a high probability of a cut this week, with futures pricing suggesting two more cuts are expected by the end of the year. The Fed’s updated forecasts and Mr. Powell’s press conference will be critical in shaping those expectations.
