Easier to cut interest rates, harder to set the tone! There are serious divisions within the Federal Reserve, and the market is closely watching Wednesday's decision guidance

According to Zhitong Finance APP, the Federal Reserve is preparing to restart interest rate cuts for the first time in nine months to address the slowdown in the labor market, persistent inflation pressures above the 2% target, and special measures pushed by U.S. President Donald Trump to lower borrowing costs. However, this week's interest rate cut may not necessarily indicate that the Federal Reserve will enter a smooth rate-cutting cycle.

A series of recent weak data has raised market concerns that the labor market may fall into a more severe recession, which could drag down consumer spending and overall economic growth. However, the current inflation rate remains above the Federal Reserve's 2% target, and the tariff policies implemented by the Trump administration pose a risk of pushing prices higher, which has made some policymakers cautious about cutting rates too quickly.

Former Philadelphia Fed President Pat Harker pointed out that the anticipated first rate cut on September 17 would typically mark the beginning of a complete cycle, but this time "it is still uncertain whether the path is clear."

There may be significant divisions within the Federal Reserve, with some members leaning towards not cutting rates, while others are calling for larger cuts—this week's decision may see 3 to 4 voting members oppose the rate cut, and if 4 oppose, it would set a record since 1990; 3 opposing would be the first time since 2019.

Against the backdrop of the White House attempting to expand its influence over the Federal Reserve, policymakers are facing increasingly severe challenges to the U.S. economy. Although Trump's attempt to fire Fed Governor Lisa Cook was temporarily blocked by the courts last month, his nomination of Fed board ally Stephen Moore, if confirmed by the Senate, could participate in this week's meeting.

Rate Cut Begins, Employment, Tariffs, and Inflation Triangle Dilemma to be Resolved

Employment and inflation data show that two consecutive weak employment reports, a rise in unemployment claims to a nearly four-year high, and a revision reducing job growth data by 910,000 for 2024 to early 2025 have all strengthened the market's bet on a 25 basis point rate cut this week.

However, the Federal Reserve's assessment of the labor market is caught in a complex situation due to a "strange balance": the Trump administration's immigration restrictions have led to a simultaneous weakening of labor demand and a reduction in supply, making it difficult to gauge the true weakness of the job market.

Nonetheless, this week's rate cut will free the Federal Reserve from its wait-and-see stance since the beginning of the year. Previously, officials maintained an interest rate range of 4.25%-4.5%, mainly due to concerns that tariffs could lead to sustained inflation.

Vincent Reinhart, chief economist at the New York Bank Investment Company, believes the Federal Reserve needs to respond to weak employment, but it is unclear whether further rate cuts will follow, stating, "We have not yet reached a critical turning point."

The transmission effect of tariffs on consumer prices has begun to show, but the current impact is limited as companies absorb some of the costs. Powell acknowledged that the impact of tariffs may be temporary but warned of the need to be vigilant about the risk of sustained inflation. Service prices, which have not been directly impacted by tariffs, continue to rise, raising concerns.

Mark Giannoni, chief U.S. economist at Barclays Capital, pointed out that the dual shocks of trade and immigration make it difficult for the Federal Reserve to achieve both full employment and price stability simultaneously, leading to uncertainty in policy directionNevertheless, after the latest employment report was released, Barclays has raised its interest rate cut forecast, expecting three rate cuts of 25 basis points each in the remaining meetings of 2025, with another cut in March and June 2026.

As the interest rate decision approaches, divisions among Federal Reserve officials intensify

The market is closely watching the Federal Reserve's interest rate decision and Powell's press conference, which will be announced at 2 PM Eastern Time this Wednesday. Analysts will assess the economic situation based on the policymakers' latest forecasts—this is the first update since June.

Some economists point out that as the effects of government tax cuts and Federal Reserve rate cuts gradually transmit to households and businesses, concerns about an economic slowdown may turn around in the coming months.

Wells Fargo economists stated in a report on September 10 that they are "more optimistic about the economic growth outlook," believing that if tariff policies stabilize, the most severe phase of trade shocks may be in the past.

Within the Federal Reserve, there were already visible divisions during the July meeting between Governor Christopher Waller and Michelle Bowman: both opposed keeping interest rates unchanged at that time, downplaying concerns about inflation caused by tariffs while emphasizing risks in the labor market.

As a potential candidate for Fed Chair under Trump, Waller advocates that there is no need to lock in a continuous rate cut path but leans towards multiple cuts in the coming months.

Other officials, however, take a more cautious stance—St. Louis Fed President Alberto M. Musalem emphasized this month the need for a "balanced policy" to avoid overemphasizing a single dimension of either supporting employment or curbing inflation.

Atlanta Fed President Raphael Bostic still insists that only one rate cut in 2025 is appropriate, while Kansas City Fed President Jeff Schmiedt explicitly opposed current rate cuts at the end of August—although both statements were made before this month's weak employment report was released.

Former Kansas City Fed President Esther George pointed directly to the core issue: "The Federal Reserve needs to clarify the real problem it aims to solve—whether it is stimulating demand or adjusting policy to a more normal level? These key points remain to be clarified."

It is noteworthy that current and future vacancies on the Federal Reserve Board may introduce more supporters for rate cuts.

If Stephen Moore, nominated by Trump, is confirmed by the Senate vote on Monday night; if Governor Lisa Cook is dismissed (a previous court ruling has temporarily blocked this action), another vacancy will arise; and Powell's term will expire in May next year, with the government weighing new chair candidates. This series of personnel changes may further influence the direction of Federal Reserve policy, becoming an important context for the market's interpretation of the interest rate decision