The U.S. Federal Reserve (Fed) convenes this week, with expectations of an interest rate cut, the first since December last year. The extent of the cut remains uncertain but is expected to be 25 basis points, according to analysts.
“We expect the U.S. Federal Reserve (Fed) to reduce interest rates by 25 basis points (bp) during its meeting on September 17, bringing the Fed funds rate target to 4.00%-4.25%,” anticipates Michael Krautzberger, Global CIO of Public Markets at Allianz GI, in an analytical note.
The expectation of a rate cut is widespread, though the possibility of a larger 50 basis point cut is still being considered.
As the analyst explains, despite the impact of U.S. tariff policy on inflation, “real GDP [Gross Domestic Product] growth has halved compared to 2024, with consumers about to face renewed pressure on their real incomes in the coming months,” which means “this macroeconomic scenario paves the way for the Fed to resume its rate-cutting cycle this month.”
Since inflation is above the Fed’s target, the balance of probabilities is expected to “favor a 25 bp cut rather than a 50 bp one in September.”
Matthew Ryan, an analyst at Ebury, states, “a 50 basis point cut would be an extremely negative outcome for the dollar, but it is not forecasted to be on the agenda, nor does the Fed seem inclined to suggest this possibility in the future.”
Nevertheless, markets are currently anticipating “a 25 basis point reduction on Wednesday and a non-negligible one-in-ten chance of a 50 basis point cut.”
Juhi Dhawan, a macro strategist at Wellington Management, also highlights that “with weak wage data and rising inflation, the Fed is facing a potential ‘stagflation’ dilemma [economic stagnation and inflation] and some tough choices, as it is pulled in opposite directions in pursuit of its dual mandate.”
Labor market indicators, including the unemployment rate and wage growth, will be “important signals for the Fed on the direction of demand-driven inflation, given the higher tariffs scenario and the ongoing crackdown on immigration.”
Despite accelerating inflation, the analyst expects the Fed “to increasingly focus on the weakening economy.”
Xtb also highlights, in an analytical note, that “given that Fed Governor Lisa Cook will vote following a court ruling against President Trump’s attempt to dismiss her, and considering that Stephen Miran’s FOMC appointment may not occur before the meeting, the most likely outcome is a 25 basis point cut, rather than a 50 basis point cut.”
“Overall, the U.S. interest rate market is forecasting three 25 basis point cuts for 2025, totaling 146 basis points in cuts between now and the end of 2026,” the week’s anticipation reads.
The Fed meeting begins today and ends this Wednesday, when the monetary policy decision will be announced, followed by a press conference with Fed Chairman Jerome Powell.
The last time the U.S. central bank cut rates was in December 2024, and it has since paused, maintaining the rate unchanged, leading to several calls from President Donald Trump for a reduction.
