"New Fed News Agency": The most unusual Fed meeting in years is coming, with the number of rate cuts this year in focus

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On Tuesday, renowned financial journalist Nick Timiraos, known as the “New Fed Whisperer”, wrote that Federal Reserve officials have spent months weighing conflicting risks—stubborn inflation making rate cuts seem inappropriate, while a weakening job market provides a reason to cut rates. This week, they are prepared to take a stance.

Timiraos expects that at the end of the meeting on Wednesday local time, Fed officials will announce a 0.25 percentage point rate cut due to the recent slowdown in job growth.

Timiraos commented that, this FOMC meeting comes at an unusual political moment for the Fed, making it one of the strangest meetings in recent years. Previously, President Trump had for months criticized the Fed for its reluctance to cut rates, and a series of legal disputes have raised questions over who will attend this meeting:

On Monday evening local time, a federal appeals court upheld an injunction by a 2-1 ruling, allowing Fed Governor Lisa Cook to participate in the two-day meeting starting Tuesday. Last month, Trump attempted to remove Cook over controversial real estate transaction allegations. The Trump administration stated it would appeal to the U.S. Supreme Court.

As the Cook case ruling was released, the U.S. Senate was voting to confirm Trump’s economic adviser Stephen Millan to another vacant position on the Fed board, allowing him to attend this September meeting. Millan will sit in the same corner of the Fed meeting room table as Cook, separated by just one board member.

Key points

Fed Chair Powell already signaled last month that he will prioritize employment issues over persistent inflation concerns. With the rate cut decision almost a foregone conclusion, investors will closely watch whether Powell shifts further from his previous stance. Timiraos said this is a move likely to spark disagreement, and whatever Powell does may prove controversial.

Given the strategic uncertainty, the core issue is what signals Powell will send in addition to this week’s rate cut. In a highly anticipated speech last month, he expressed more concern for the labor market than for inflation, a stance not shared by all his colleagues at the time. Powell argued that Fed officials could assume tariff-driven price increases are only temporary unless proven otherwise—a stance reminiscent of the Fed’s initial mishandling of inflation in 2021.

The question is, after the weak August employment data was released, will Powell further amplify this concern? If so, it would confirm market expectations for further rate cuts in upcoming meetings. But this may require Powell to overcome the unease of colleagues who are reluctant to commit to such swift action amid doubts about the neutral rate position and whether it should be reached soon.

If these complicated factors weren’t enough, Powell must also contend with political pressures that could make his last few months as chair a turning point for the Fed’s independence.

Timiraos pointed out, one number to watch in the quarterly economic projections due Wednesday: will Powell and his colleagues show a total of three rate cuts for this year, or stick to two as the majority expected in June, when the labor market looked stronger.

These forecasts are not the result of Fed committee deliberations and are especially awkward at the September meeting. Officials must write down their expected year-end rate levels, which effectively serve as placeholders for the October and December meetings. These forecasts often become focal points during Powell’s post-meeting press conference.

Timiraos noted these projections will be seen as rough answers to three interrelated questions likely to dominate this week’s closed-door discussions: How worrying is this summer’s employment slowdown? How quickly should rates be lowered to the neutral level—where policy neither stimulates nor restricts the economy? And what is the neutral rate under current conditions?

At the last meeting in July, the Fed kept rates unchanged because they believed the risk of high inflation outweighed that of a weakening job market. But Powell said afterward that if these risks were perfectly balanced, the right course would be to move toward a more neutral policy stance.

This raises the question: how fast do officials believe rates should move to neutral—a difficult and constantly shifting target? The current benchmark federal funds rate is about 4.3%. While Fed officials estimate the neutral rate to be around 3%, they have revised this estimate upward in recent years.

This also means that, compared with when rate cuts started from about 5.3% a year ago, Fed officials now have less margin for error. In September last year, the Fed cut rates by 0.5 percentage points in one meeting, and then by 0.25 percentage points in each of the last two meetings of the year.

As US inflation trends have moved from flat to rising, more Fed officials may believe the current economic backdrop is less suited than last year for aggressive easing. Last year, the increase in unemployment was steeper and inflation was clearly moving toward the Fed’s 2% target.

Some officials may even have little enthusiasm for this week’s cut. US stocks repeatedly hit record highs, and with new tax cuts taking effect, the economy may receive further fiscal support next year. Timiraos quoted former Kansas City Fed President George: “We have unemployment at 4.3%, inflation well above target, and easy financial conditions, so saying a rate cut now is to stimulate demand seems a bit far-fetched.”

How weak is the job market?

Since the last meeting at the end of July, the US employment picture has changed significantly. At that time, reports showed nonfarm payrolls were rising by an average of 150,000 per month over the three months ended June. That figure has since been revised down to 96,000, and further to just 29,000 for the three months ended August. In July, for the first time since the post-pandemic reopening in 2021, the number of unemployed surpassed the number of unfilled job openings.

This data suggests the slowing job market may be due to overly tight high-rate policy, or to policy changes raising business costs, including new tariffs and a sharp reduction in immigration.

Timiraos cited former Dallas Fed President Rob Kaplan:

We know the job market is weakening. I think there will be a lot of discussion in the meeting centered around: just how weak is it?

Kaplan’s conversations with businesses led him to conclude that, while the economy looks weak, it isn’t collapsing, which for him means one should be more cautious about promising a series of cuts.

Kaplan is cautious about cutting rates because he thinks the neutral rate is now higher, about 3.5%, meaning the Fed only needs three to four cuts of 0.25 percentage points each to reach that level.

Strategists outside the Fed are more worried about doing too little rather than too much, as labor market risks are usually asymmetric. Once unemployment starts rising slowly, it tends to surge. Timiraos quotes BCA Research chief global strategist Peter Berezin:

If the labor market cools noticeably, those with jobs who feel safe will start to worry. They’ll cut spending, and those worries will become self-fulfilling. He thinks a big 0.5 percentage point cut isn’t likely, but is justified, since, “I think the odds of recession are higher than they expect.”

The Fed and Trump are in a tough spot. If they fumble this and the economy really slows, dragging their feet on rate cuts, it will give Trump more power to further undermine the Fed’s independence.

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