The Federal Reserve is expected to cut interest rates this week; how far will it go?
Highlight of the story: The Federal Reserve is poised to cut interest rates for the first time in 2025 as the job market weakens and inflation remains above target. Economists expect a quarter-point reduction this week, but divisions remain over how far and fast the Fed should move. The Federal Reserve is preparing to cut interest rates this week for the first time in 2025, a decision that reflects growing concern over a weakening U.S. labor market. After keeping its benchmark rate unchanged for nine months, the Fed is expected to deliver at least a quarter-point reduction during its September 16–17 meeting, with the possibility of further cuts later in the year. The move comes as unemployment rises to its highest level since 2021, and recent revisions indicate that the economy actually lost jobs in June, signaling a troubling slowdown in hiring.At the same time, inflation remains elevated at 2.9% overall and 3.1% on a core basis, above the Fed’s 2% target. This tension highlights the Fed’s dual challenge: protecting jobs while preventing inflation from spiraling out of control. Chair Jerome Powell has acknowledged that tariffs and trade disputes are raising prices, but has warned that labor market risks are becoming more urgent.
After nine months of keeping rates steady, the Federal Reserve is likely to start lowering interest rates this week to boost a slowing U.S. economy. The central bank’s two-day policy meeting on September 16 and 17 happens as inflation stays stubbornly high, while job market data shows worrying signs of weakness.
Pressure from politics and the economy
President Donald Trump has publicly criticized Fed Chair Jerome Powell for months, urging the central bank to cut rates more aggressively. While the Fed has overlooked Trump’s remarks, the latest job numbers have changed the situation. The U.S. economy added just 22,000 jobs in August, the weakest increase in years, while unemployment rose to its highest point since late 2021.
Revisions also showed that the economy lost 13,000 jobs in June, marking the first decline since December 2020. Economists say the fourth consecutive month of disappointing job data indicates hiring has stalled, giving the Fed enough reason to cut rates despite ongoing inflation worries.
Why the Fed is considering cuts
The Fed’s two main goals are to promote maximum employment and keep inflation low. Cutting interest rates makes borrowing cheaper for businesses and households, encouraging spending and possibly boosting hiring. However, this year’s challenge has been tariffs and trade policies that slow growth while pushing up some prices.
Powell has noted that the impact of tariffs on consumer prices is “clearly visible.” He has also warned that the bigger risk now lies in the job market. “When our goals are in tension like this, our framework calls for us to balance both sides of our dual mandate,” Powell said last month in Jackson Hole, Wyoming.
Inflation still elevated
Consumer prices rose 2.9% in August, with core inflation—which excludes food and energy—remaining steady at 3.1%. While both figures are above the Fed’s 2% target, economists argue that weak job growth is a bigger concern. “The rise in jobless claims overshadows the importance of the inflation report,” said Kathy Bostjancic, chief economist at Nationwide. “It highlights that the labor market is losing steam and reinforces that the Fed needs to start cutting rates.”
How big will the cut be?
Markets are anticipating a 92% chance of a quarter-point cut, according to the CME FedWatch tool. A smaller group of economists believes the Fed could make a half-point reduction if recession risks increase. The central bank’s current benchmark stands at 4.25% to 4.5%.
However, the decision is unlikely to be unanimous. Analysts expect several Fed governors to disagree, either advocating for a larger cut or for no change at all. If this occurs, it would signal one of the most divided Fed meetings in decades.
How many cuts ahead?
Futures markets are betting on three cuts this year, while economists are split between two and three. The median forecast expects reductions in September and December, although some anticipate an additional move as soon as October if the economy continues to weaken.
The Lisa Cook factor
The meeting also comes against the backdrop of a legal fight over Fed Governor Lisa Cook. Earlier this month, a federal judge blocked Trump’s attempt to remove her from the board over pre-confirmation mortgage fraud allegations. Cook denies wrongdoing and argues that the president is targeting her for defending the Fed’s independence.
The Justice Department is appealing the ruling, and a decision is expected by September 15 — just one day before the Fed convenes. Whether Cook participates in the meeting could signal how insulated the Fed remains from political interference at a critical moment for the U.S. economy.