Will the Fed Cut Interest Rates by 50 Basis Points Next Week?

The Fed or Federal Reserve , will have its 16-17 September policy meeting and is anticipated to involve one of the most difficult decisions in recent times. After keeping interest rates steady for nine months, the central bank is now widely expected to deliver a quarter-point rate reduction.

But the backdrop is peculiarly complex: inflation remains above the Fed’s benchmark, and hiring has decelerated sharply.Trade tensions continue to add volatility, while political pressure keeps building.

What might otherwise be a routine adjustment to monetary policy has become the focus of discussions with economists, investors and politicians all providing their own perspective and insight.

At stake is not just the direction of interest rates, but also the Fed’s track record for navigating challenges. Some fear this could be an episode of stagflation, with sluggish growth and steady inflation.

Imminent Fed rate cut?

Market pricing reveals that investors are certain the Fed will cut its benchmark rate from the current 4.25–4.5% next week.
The cut is expected to be at least 25 basis points.

Futures markets put the probability of the move at nearly 90%.
There is only a slim hope for a more severe 50-basis-point cut. Although a cut is nearly inevitable, the size and signalling matter significantly to markets and to the economy.

The labour market

The August jobs report showed just 22,000 new jobs created, far lower than the more than 100,000 per month seen earlier this year. The unemployment rate has risen to 4.3%, the highest in nearly three years.

Jim Bianco, at Bianco Research, argues that 22,000 jobs created per month can be the “new normal” in an economy that is squeezed by tighter immigration controls.

Matthew Luzzetti, Deutsche Bank’s top U.S. economist, disagrees that tighter supply is behind the slowdown. Instead, he attributes the deceleration to weak demand. Tariff shocks, policy uncertainty, and business caution are suppressing hiring. For Luzzetti, this supports a precautionary rate reduction to avoid recession.

Steve Englander of Standard Chartered sees the job data as hiding underlying weakness. He has pushed a 50-point “catch-up” cut, an amount similar to what the Fed accomplished last year when things suddenly relaxed.

The situation is further complicated by methodology. Payroll adjustments will erase up to 800,000 jobs from the rolls between April 2024 and March 2025. This raises concerns that the jobs market is more fragile than the top-line numbers suggest.

Inflation and FED

As job growth slows, inflation remains. The consumer price index has exceeded the 2% target of the Fed for four consecutive years. Tariffs on imported goods are raising business and consumer expenses, and labour shortages are contributing to persistent wage inflation.

Rockefeller International’s Ruchir Sharma has urged the Fed to increase interest rates, not cut them, warning that monetary policy easing in this environment risks eroding policy credibility and creating asset bubbles.

The Fed, in his opinion, is becoming too susceptible to “rush to the rescue” at any sign of economic strain, a tendency that inflates markets but undermines stability over the longer term.

This paradox of decelerating growth combined with high inflation places the Fed uncomfortably in the position to ease into a stagflationary environment, one that has previously eroded public confidence in central banks.

Political pressures and credibility risks

The Fed action is coming under intense political pressure. President Donald Trump, the man who had installed Jerome Powell in his first term, has escalated his criticism of the Fed, accusing it of moving too late to spur growth. Some members of Congress are also asking Powell to prioritise job creation and others are warning against reviving inflation.

The autonomy of the central bank comes into focus again. Analysts note that ongoing pressure from the White House can complicate Powell’s messaging game. If markets perceive the Fed caving to politics, its credibility in battling inflation will suffer, undermining the very effectiveness of monetary policy.

Global effects of monetary policy

The Fed’s action won’t be contained within US borders. Reducing interest rates would have the effect of driving the US dollar lower, easing financial conditions abroad as well as pushing up commodity prices. Gold, in reality, has already gained on expectations of loosening policy, as investors are seeking a hedge against inflation.

Relief might arrive for emerging markets in the form of the Fed’s move. Weakening U.S. yields relieve pressure on capital outflows, giving developing economies room to catch their breath. But if the Fed follows a drastic easing path, volatility can rise, most significantly in dollar-sensitive currencies and commodities.

Market implications: Stocks, yields, oil, metal and forex

U.S. stocks are at record levels, but JPMorgan strategists are warning that there may be a pullback if the Fed only delivers 25 points of the anticipated cut. Markets would then consider the move to be insufficient in the face of economic risk. A 50-point cut would result in a short-term rally but add to the fears of what the Fed is perceiving in the data.

Treasury yields have already declined on weak job numbers, and the 10-year yield is coming close to multi-month lows. A dovish Federal Reserve could go on to flatten the yield curve, or a surprise containment could trigger a steep turnaround.

Oil and metal markets are paying close attention because tariffs and Fed policy together drive demand expectations. The rise in gold suggests investors are gearing up for extended uncertainty.

The dollar experienced a seven-week trough recently when traders incorporated Fed cuts into their calculations. A dovish tone can further minimise that fall, to the benefit of big counterparts such as the euro and yen.

The Fed’s likely outcom

As of 9 September, the expectation is still for a 25-basis-point reduction. This would recognise decelerating labour conditions without producing an overly dovish policy that could fan inflation concerns. A 50-point reduction is still on the table, though only if Powell and his staff consider the revisions to the labour market to be so bad as to demand urgency.

The forward guidance of the Fed will be as important as the cut itself. Markets will analyse Powell’s press conference for clues on whether this is an insurance cut for a one-off or the start of a more extended easing cycle.

Next week’s action won’t please everyone. Hawks will complain the Fed is getting soft on inflation. Doves will complain the reduction is too modest in the face of labour softness. Even if expectations are fulfilled, investors may see it as a “sell-the-news” situation.

Powell’s test is to demonstrate that the Fed can still steer the economy with contradictory signals and political upheaval, without regressing to the mistakes of the 1970s stagflation era. Whether such a modest 25-point cut can do that balancing act or if more extreme measures are necessary, remains the outstanding question as September’s meeting approaches.

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