Under extraordinary political circumstances, a significant and controversial debate over future interest rate paths is unfolding. At the September Fed meeting, a 0.25 percentage point rate cut is expected due to slowing employment growth. Investors will focus on economic projections to gauge how many rate cuts the Fed anticipates this year. Officials are discussing the extent of labor market weakness and how quickly rates should be lowered to neutral levels.

Renowned financial journalist Nick Timiraos, known as the "new Fed communicator," wrote that Fed officials have spent months weighing conflicting risks – persistent inflation making rate cuts seem inappropriate, while a weakening job market provides justification for cuts. This week, they are prepared to take a stance.

Timiraos expects Fed officials to announce a 0.25 percentage point rate cut at Wednesday's meeting conclusion, citing recent employment growth deceleration.

Timiraos commented that this FOMC meeting occurs during an unusual political moment for the Fed, making it one of the most peculiar meetings in recent years. Previously, President Trump had criticized the Fed's reluctance to cut rates for months, while a series of legal disputes raised questions about meeting attendance:

On Monday evening, a federal appeals court upheld an injunction by a 2-1 decision, allowing Fed Governor Lisa Cook to participate in the two-day meeting beginning Tuesday. Trump had attempted to remove Cook last month over controversial real estate transaction allegations. The Trump administration indicated it would appeal to the Supreme Court.

Simultaneously with the Cook case ruling, the Senate was voting to confirm Trump's economic advisor Stephen Miran for another vacant Fed governor position, enabling his participation in the September meeting. Miran will sit in the same corner of the Fed meeting room as Cook, separated by only one governor.

Key Points

Fed Chairman Powell signaled last month that he would prioritize employment concerns over lingering inflation worries. With the rate cut decision nearly certain, investors will closely watch whether Powell will shift further from his previous stance. Timiraos stated this could be a divisive move that might prove controversial regardless of his approach.

Given strategic uncertainties, the core question is what signals Powell will send beyond this week's rate cut. In a highly anticipated speech last month, he expressed greater concern about the labor market than inflation – a position not all colleagues endorsed at the time. Powell believes Fed officials can assume tariff-driven price increases are temporary unless proven otherwise – an attitude reminiscent of the Fed's initial inadequate response to inflation in 2021.

The question is whether Powell will amplify these concerns following weak August employment data. Doing so would validate market expectations for continued rate cuts in upcoming meetings. However, this might require Powell to overcome colleague unease – they are reluctant to commit to such rapid action when uncertain about neutral rate levels and whether they should be achieved.

If these complications weren't enough, Powell must also handle political pressures that could make his final months as chairman a watershed moment for Fed independence.

Timiraos highlighted particular attention should be paid to one figure in Wednesday's quarterly economic projections: whether Powell and colleagues will indicate three total rate cuts this year or maintain the two cuts that relatively more people expected in June when the labor market appeared stronger.

These projections are not products of Fed committee deliberation and seem particularly awkward in September meetings. Officials must write down their expected year-end rate positions, essentially serving as "placeholders" for October and December meeting expectations. These forecasts often become focal points during Powell's post-meeting press conferences.

Timiraos noted these projections will be viewed as rough answers to three interconnected questions likely dominating this week's closed-door discussions: How concerning is this summer's employment growth slowdown? How quickly should officials lower rates to the neutral level that neither stimulates nor restrains economic activity? What exactly is the neutral rate in the current environment?

At July's previous meeting, the Fed maintained rates unchanged because they viewed high inflation risks as more concerning than labor market weakening risks. However, Powell stated afterward that if these risks were completely balanced, it would mean moving toward a more neutral policy stance.

This raises the question: How quickly do officials believe rates should be pushed toward neutral levels – a difficult-to-determine, constantly changing target? The current benchmark federal funds rate is approximately 4.3%. Although Fed officials consider the neutral rate around 3%, they have continuously raised this estimate in recent years.

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

As U.S. inflation trends shifted from flat to upward, more Fed officials might believe the current economic backdrop is less suitable for aggressive easing than last year. Last year, unemployment rose more steeply while inflation clearly declined toward the Fed's 2% target.

Some officials might even lack enthusiasm for this week's rate cut. U.S. stock markets have repeatedly hit new highs, and the economy might benefit from fiscal support next year as new tax cut provisions take effect. Timiraos quoted former Kansas City Fed President George: "With unemployment at 4.3%, inflation well above target, and loose financial conditions, the argument for cutting rates now to stimulate demand seems somewhat stretched."

How Weak is the Job Market?

Since the last meeting in late July, the U.S. employment situation has clearly changed. At that time, reports showed nonfarm payrolls averaged 150,000 monthly additions in the three months through June. However, this figure was later revised down to 96,000 and further declined to 29,000 in the three months through August. In July, the number of unemployed Americans exceeded unfilled positions for the first time since the post-pandemic economic restart in 2021.

This data suggests the employment market slowdown might result from overly restrictive high interest rate policies or policy changes, including new tariffs raising business costs and significantly reduced immigration.

Timiraos quoted former Dallas Fed President Rob Kaplan:

"We know the job market is weakening. I think there will be substantial discussion in the meeting focused on: just how weak is the job market?"

Kaplan's business communications led him to conclude that while the economy shows weakness, it hasn't collapsed, which in his view means being more cautious when committing to a series of rate cuts.

Kaplan's caution about rate cuts stems from his belief that the neutral rate is currently higher, around 3.5%, meaning the Fed would only need three to four 0.25 percentage point cuts to reach that level.

Some strategists outside the Fed are more concerned about the Fed doing too little rather than too much, because labor market risks are typically asymmetric. Once unemployment begins rising slightly, it tends to climb significantly. Timiraos quoted BCA Research's Chief Global Strategist Peter Berezin:

"If the labor market cools significantly, those who currently have jobs and consider themselves relatively safe will start worrying. They'll cut spending, and this concern becomes self-fulfilling. Although a large 0.5 percentage point cut is unlikely, it's reasonable because I believe recession odds are higher than they expect."

"The Fed and Trump are in a very tricky position. If they mess up, if the economy really slows down and they drag their feet on rate cuts, that will give Trump more power to further undermine Fed independence."