Will the Federal Reserve cut interest rates in September? CICC's two teams have opposing views

After remaining inactive in July, the debate over whether the Federal Reserve will cut interest rates in September is becoming increasingly intense.

On July 31, CICC macroeconomic analysts, including Xiao Jiewen, believed that the latest signals indicate the Federal Reserve is inclined to maintain patience and will not cut rates due to pressure from Trump. At the July meeting, Federal Reserve Chairman Jerome Powell and most officials preferred to maintain a tightening stance, believing that the inflation risks brought by tariffs have not yet been resolved and that the labor market remains solid, thus not meeting the conditions for a rate cut. Powell also emphasized the independence of the Federal Reserve, suggesting that it would not yield to political pressure.

However, there are equally compelling reasons for a rate cut in September. CICC's Chief Overseas Strategy Analyst Liu Gang and others pointed out that the market may have misunderstood the prerequisites for the Federal Reserve's decision-making. A rate cut does not have to wait for inflation to decline; as long as the "one-time" impact of tariffs on inflation is basically determined, the Federal Reserve can take action. With the recent tariff agreements reached by the U.S. with multiple countries, this path is becoming increasingly clear, preserving the possibility of a rate cut in September.

CICC's two starkly different judgments on the prospects for a Federal Reserve rate cut in September reflect the current deep divisions in the market regarding the direction of monetary policy.

Inflation Path Clarified: September Rate Cut Window Still Open

CICC's research department Chief Overseas Strategy Analyst Liu Gang and others believe that the conditions for the Federal Reserve to take action are maturing. There is a common misconception in the market that the Federal Reserve must wait until inflation data clearly declines before it can cut rates. In fact, as long as the impact of tariffs on inflation is basically determined, the Federal Reserve can act in advance.

First, there is an inherent need for the Federal Reserve to cut rates. Data shows that the current real interest rate in the U.S. is 1.63%, significantly higher than the natural rate of about 1%, which means that monetary policy is constraining the economy. At the same time, there are signs of "moderate weakening" in economic growth and the job market. Although the U.S. GDP growth rate for the second quarter reached an annualized 3%, better than expected, if we exclude the fluctuations in imports and exports and inventory caused by tariffs, the average growth rate over the past two quarters is only about 1.5%, indicating that the underlying growth momentum is indeed slowing.

Secondly, the impact path of tariffs on inflation has gradually become clear. Since July, the U.S. has reached tariff agreements with multiple trading partners, including Indonesia, Japan, and the European Union, and the final tax rates have been lowered compared to previous "threats." According to estimates, the effective tax rate after August 1 is likely to remain at 15%-16%, making the transmission path of tariffs to inflation relatively predictable. CICC predicts that this impact will be "one-time," mainly reflected in the third and fourth quarters, with the year-end CPI expected to reach 3.3% year-on-year and core CPI at 3.4% year-on-year.

**Therefore, under these circumstances, the Federal Reserve can cut rates. The market's misunderstanding of the Federal Reserve is that it must wait for inflation itself to "decline" before it can cut rates. However, if: 1) the Federal Reserve itself needs to cut rates (because growth and employment are moderately weakening, although not urgently; and also because financing costs are relatively high, reflected in the real interest rate of 1.63% being higher than the natural rate of 1%), and 2) the inflation impact of tariffs is indeed "one-time," then,**as long as the impact path of tariffs on inflation is basically determined, The Federal Reserve can take action, so based on the current progress of tariff negotiations, the possibility in September still exists. Of course, the inflation data, especially employment data, in the next two months, as well as the Jackson Hole annual meeting at the end of August, are important observation points.

Under the baseline scenario, CICC expects the Federal Reserve may cut interest rates 1 to 2 times this year, lowering the policy rate to a range of 3.75% to 4%.

Inflation Risks and Policy Independence May Keep the Federal Reserve on Hold

CICC's macroeconomic analysts, including Xiao Jiewen, believe that the Federal Reserve is unlikely to cut interest rates due to pressure from Trump, and the possibility of a rate cut in September is low. Their core logic is based on the recent statements from the Federal Reserve and its commitment to policy independence.

In the most recent meeting, the Federal Reserve decided to stay put, with Chairman Powell and most officials leaning towards maintaining a tightening stance. They believe that the inflation risks brought by tariffs have not been fully resolved, and the labor market remains solid, thus not meeting the conditions for a rate cut. Powell acknowledged that the current policy is "moderately restrictive," but believes this is not sufficient to justify a rate cut, and the Federal Reserve needs to "remain patient."

A more critical factor is the independence of the Federal Reserve. In the face of political pressure to cut rates, Powell clearly stated that the Federal Reserve will not adjust its rate path for this reason, and its policy goals are full employment and stable inflation, rather than helping the government reduce debt costs. The report emphasizes that the market may underestimate the Federal Reserve's determination to maintain its independence. Monetary policy is decided collectively by 12 voting members, and even if the chairman changes, it is difficult to easily alter the collective policy direction.

The Federal Reserve's decision to stay put in the July meeting aligned with market expectations. Two governors opposed maintaining the rate, but Powell and most officials leaned towards maintaining a tightening stance: They believe that the inflation risks brought by tariffs have not been resolved, and the labor market remains solid, thus not meeting the conditions for a rate cut. Powell also emphasized the independence of the Federal Reserve, suggesting it will not yield to political pressure. We believe that the inflation effects of tariffs will further manifest in the coming months, making it difficult for the Federal Reserve to cut rates in September. If Trump continues to escalate tariffs, the timing of a rate cut may be further delayed. Regarding Trump's pressure to cut rates, we believe the market underestimates the Federal Reserve's determination to maintain its independence. The interest rate decision is made collectively by 12 voting members, and even if Trump fires Powell, it is difficult to change the direction of monetary policy.

This view predicts that the Federal Reserve may choose to wait until the peak of tariff-driven inflation has passed before considering easing measures. If tariffs are further escalated after August 1, inflationary pressures will intensify, and the timing of the Federal Reserve's rate cut may be further postponed