A Fed Rate Cut Marks a Pivot to the Job Market

Federal Reserve officials are widely expected to step in and support a slowing US job market on Wednesday by lowering interest rates a notable shift after months of holding steady due to concerns over tariff-driven inflation.

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This policy pivot arrives under heavy political pressure. President Donald Trump has repeatedly called for a “big cut” this week, adding to the drama surrounding the Fed’s decision. Questions even lingered over who would be seated at the table, with clarity only coming late Monday after the Senate confirmed a new Fed governor and a last-minute court ruling allowed another official to remain in her role, at least for now.

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Despite the political noise, investors are focused squarely on Fed Chair Jerome Powell and the central bank’s updated economic projections. These will be released alongside the rate decision at 2 p.m. in Washington, with Powell’s press conference scheduled half an hour later. Markets will be watching closely for signals about how aggressively the Fed intends to ease policy in the months ahead.

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Analysts don’t expect Powell and his colleagues to commit to an aggressive series of cuts. Differing views on how much weight to place on weak employment versus still-elevated inflation will likely keep the central bank cautious.

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“Each additional rate cut becomes harder to justify unless the labor market shows further deterioration,” explained Aditya Bhave, senior US economist at Bank of America.

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While the rate decision is the main event, unusual developments around the Federal Open Market Committee’s (FOMC) voting lineup have captured headlines.

On Tuesday morning, Trump ally Stephen Miran was sworn in as a Fed governor just in time for the policy meeting. His appointment has been controversial, given he has only taken unpaid leave not resigned from his role as chair of the White House Council of Economic Advisers, raising concerns over his independence.

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Meanwhile, Fed Governor Lisa Cook was cleared to remain on the board after a divided appeals court temporarily blocked Trump’s attempt to remove her. The administration alleges mortgage fraud, which Cook denies, and plans to appeal to the Supreme Court. Her long-term seat doesn’t expire until 2038, meaning her presence or potential replacement could influence Fed policy for decades.

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Still, the near-term path of interest rates is unlikely to shift dramatically regardless of the immediate voting mix, said Kathy Bostjancic, chief economist at Nationwide. Longer term, however, replacing Cook with a Trump ally could tip the balance of policy.

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Adding to the intrigue, Trump will have the opportunity to nominate a new Fed chair when Powell’s current term ends in May. Miran’s short-term seat expires in January, but he could be renominated or remain in place until a successor is named. Powell is expected to field tough questions about the Fed’s independence during his press briefing.

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The upcoming vote may not be unanimous. Some policymakers could argue for a larger cut, while others might prefer to hold rates steady, reflecting diverging concerns over the balance between jobs and inflation.

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Earlier this summer, governors Christopher Waller and Michelle Bowman both Trump appointees opposed leaving rates unchanged in July, citing labor market risks. Since then, fresh data has shown a sharp slowdown in job creation, fueling broader fears of an economic downturn.

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At the same time, inflation continues to run above the Fed’s 2% target, though the effect of tariffs on consumer prices has been more moderate than initially feared, noted Bostjancic.

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If three or more officials dissent at this meeting, it would mark the first time since September 2019 that the Fed faced such significant internal division.

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Fresh forecasts will also be in the spotlight. A Bloomberg survey of economists suggests most expect the Fed to signal two total cuts this year, matching the outlook from June. That would mean one more cut after today’s decision, likely in either October or December.

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Bhave said the Fed’s June projections for inflation and unemployment still hold up reasonably well, giving policymakers little justification to increase the pace of cuts in their baseline scenario.

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Still, more than 40% of economists surveyed anticipate the Fed will pencil in three rate cuts for 2025, reflecting greater concern over the economy’s trajectory. The new projections will also shed light on how much easing officials expect beyond this year, and how they see inflation and unemployment evolving in the medium term.

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