"The New Federal Reserve News Agency": The most unusual Federal Reserve meeting in years is coming, with the number of interest rate cuts predicted this year becoming a highlight

On Tuesday, renowned financial journalist Nick Timiraos, known as the "New Federal Reserve Correspondent," wrote that Federal Reserve officials have spent months weighing conflicting risks—stubborn inflation makes rate cuts seem inappropriate, while a weak job market provides justification for cuts. This week, they are prepared to take a stance.

Timiraos expects that Federal Reserve officials will announce a 0.25 percentage point rate cut at the conclusion of their meeting on Wednesday local time, due to recent slowing job growth.

Timiraos commented that this FOMC meeting occurs at an unusual political moment for the Federal Reserve, making it one of the most peculiar meetings in recent years. Previously, U.S. President Trump had criticized the Federal Reserve for months for its reluctance to cut rates, while a series of legal controversies raised questions about who would attend the meeting:

On Monday evening local time, a federal appeals court upheld a ruling by a 2-1 vote that allows Federal Reserve Governor Lisa Cook to attend the two-day meeting starting Tuesday. Trump had attempted to remove Cook last month with controversial real estate transaction allegations. The Trump administration stated it would appeal to the U.S. Supreme Court.

At the same time the ruling on Cook's case was announced, the U.S. Senate was voting to confirm Trump's economic advisor Stephen Moore to another vacant seat on the Federal Reserve Board, allowing him to attend the September meeting. Moore will sit at the same corner of the Federal Reserve meeting room table as Cook, separated by only one governor.

Key Points

Federal Reserve Chairman Jerome Powell signaled last month that he would prioritize employment issues over persistent inflation concerns. With the rate cut decision nearly a foregone conclusion, investors will closely watch whether Powell will further shift his stance. Timiraos stated that this could be a move that sparks division, and whatever he does may provoke controversy.

Given the strategic uncertainty, the core question is what signals Powell will send beyond the rate cut this week. In a highly anticipated speech last month, he expressed greater concern about the labor market than about inflation, a stance not shared by all of his colleagues at the time. Powell believes that Federal Reserve officials can assume that price increases due to tariffs are only temporary unless proven otherwise—this attitude recalls the Federal Reserve's initial missteps regarding inflation in 2021.

The question is whether, following the weak August employment data, Powell will further amplify these concerns. If he does, it would confirm market expectations for continued rate cuts in the coming meetings. However, this may require Powell to overcome the unease of those colleagues who are reluctant to commit to such swift action amid doubts about the neutral interest rate position and whether it should be reached.

As if these complex factors were not enough, Powell must also contend with political pressures that could make his final months as chairman a watershed moment for the Federal Reserve's independence.

Timiraos pointed out that one number to watch in the quarterly economic forecasts to be released on Wednesday is whether Powell and his colleagues will write down the total number of rate cuts for this year as three, or maintain the two cuts that relatively more people expected in June when the labor market appeared stronger. **

These forecasts are not the result of deliberations by the Federal Reserve Committee, which was particularly awkward during the September meeting. Officials must write down their expected year-end interest rate positions, which serve as placeholders for expectations for the October and December meetings. These forecasts often become the focus of questions during Powell's post-meeting press conference.

Timiraos points out that these forecasts will be seen as rough answers to three interrelated questions that may dominate this week's closed-door discussions: How concerning is the slowdown in job growth this summer? How quickly should officials lower interest rates to a neutral level that neither stimulates nor suppresses economic activity? What is the neutral interest rate in the current environment?

At the last meeting in July, the Federal Reserve kept interest rates unchanged because they believed the risks of high inflation were more concerning than the risks of a weakening job market. However, Powell stated after the meeting that if these two risks were perfectly balanced, it would mean moving towards a more neutral policy stance.

This raises the question: How quickly do officials believe interest rates should be pushed towards neutral levels—a target that is difficult to pinpoint and constantly changing? The current benchmark federal funds rate is about 4.3%. Although Federal Reserve officials believe the neutral rate is around 3%, they have continuously raised this estimate in recent years.

This also means that compared to a year ago when they began cutting rates from about 5.3%, Federal Reserve officials now have less room for error. In September of last year, the Federal Reserve cut rates by 0.5 percentage points in one meeting, and in the last two meetings of that year, they each cut by 0.25 percentage points.

As U.S. inflation trends shift from flat to upward, more Federal Reserve officials may believe that the current economic backdrop is not as conducive to aggressive easing policies as it was last year. Last year, the increase in unemployment was steeper, and inflation was clearly moving towards the Federal Reserve's 2% target.

Some officials may even be indifferent to a rate cut this week. U.S. stock markets are hitting new highs, and with new tax cuts taking effect, the economy may benefit from fiscal support next year. Timiraos cites former Kansas City Fed President George, who said, "With the unemployment rate at 4.3%, inflation well above target, and financial conditions loose, saying that 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 U.S. employment situation has changed significantly. At that time, it was reported that non-farm payrolls increased by an average of 150,000 per month over the three months ending in June. However, this figure was later revised down to 96,000, and further dropped to 29,000 over the three months ending in August. In July, the number of unemployed in the U.S. exceeded the number of unfilled positions for the first time since the economic reopening after the pandemic in 2021.

These data suggest that the slowdown in the job market may be due to overly tight high-interest rate policies or changes in policy, including new tariffs that have raised business costs and a significant decrease in immigration.

Timiraos cites former Dallas Fed President Rob Kaplan as saying:

We know that the job market is weakening. I believe there will be a lot of discussion in the meeting focused on just how weak the job market really is.

Kaplan's communication with businesses has led him to conclude that while the economy appears weak, it has not collapsed, which in his view means that caution should be exercised when committing to a series of rate cuts.

Kaplan is cautious about rate cuts because he believes the neutral interest rate is currently higher, around 3.5%, which means the Federal Reserve would only need three to four cuts of 0.25 percentage points each to reach that level.

Some strategists outside the Federal Reserve are more concerned that the Fed is doing too little rather than too much, as the risks in the labor market are typically asymmetric. Once the unemployment rate begins to rise slightly, it often climbs significantly. Timiraos quotes Peter Berezin, Chief Global Strategist at BCA Research:

If the labor market cools significantly, those who are currently employed and feel relatively secure will start to worry. They will cut back on spending, and this concern can become self-fulfilling. He believes that while a significant rate cut of 0.5 percentage points is unlikely, it is reasonable because I think the chances of a recession are higher than they expect.

The Federal Reserve's situation with Trump is very tricky. If they mess it up, and the economy really slows down while they drag their feet on rate cuts, it will give Trump more power to further undermine the Fed's independence.

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