Fed debate turns to pace of cuts amid heavy Trump pressure

A string of disappointing data is fanning worries the labor market could tip into a more serious slowdown, and drag with it consumer spending and economic growth

The Federal Reserve is poised to resume cutting interest rates for the first time in nine months as it grapples with a slowing labor market, stubborn inflation and an unprecedented push by President Donald Trump for lower borrowing costs.

A cut this week, however, won’t necessarily set the Fed on a smooth glide path to lower rates.

A string of disappointing data is fanning worries the labor market could tip into a more serious slowdown, and drag with it consumer spending and economic growth. But inflation is still above the Fed’s 2% target and could yet be driven higher by tariffs. That’s making some policymakers wary of moving too fast.

Typically, an initial move like the one expected on Sept. 17 marks the beginning of a rate-cutting or rate-hiking cycle, said Pat Harker, who served as president of the Philadelphia Fed until June. This time, “it’s not obvious that’s going to happen here in a robust way,” he said.

Divisions among Fed officials over what to do next could result in multiple dissents, with some favoring no rate cut and others calling for a larger move. It could mark the first Fed meeting since 2019 with three dissents, or even the first since 1990 with four.

Policymakers are juggling the increasingly high-stakes moment for the US economy as they confront heightened pressure from a White House seeking more influence over the central bank.

Trump last month attempted to fire Fed Governor Lisa Cook, a move that has been temporarily blocked in the courts. He also named a close ally to the central bank’s Board of Governors who, if confirmed by the Senate in time, could participate in this week’s meeting.

Jobs Versus Inflation

Bets on a quarter-point rate cut this week have been bolstered by two consecutive disappointing jobs reports, a rise in filings for unemployment benefits and preliminary data revisions that showed far less robust employment growth in 2024 and early 2025 than previously reported.

The Fed’s assessment of the labor market is complicated by what Powell has called a “curious kind of balance.” While demand for labor is softening, supply is also disappearing amid the Trump administration’s immigration crackdown — making it difficult to tease out just how weak the underlying job market really is.

A rate cut this week would nonetheless pull policymakers off the sidelines, where they’ve been all year. Officials have kept rates in a range of 4.25% to 4.5%, largely out of concern that Trump’s sweeping imposition of tariffs on US trading partners could drive persistent inflation.

“I see weakness in the employment data that they’ve got to respond to,” said Vincent Reinhart, chief economist of BNY Investments, who anticipates a cut at the coming meeting, but currently sees no need for continuous reductions after that. “We’re not at a break-glass moment.”

Tariff Pass-Through

Pass-through from the tariffs to consumer prices has started to show up, but has been limited as many companies absorb at least part of the duties for now. Powell has acknowledged the impact of tariffs on prices may ultimately prove short-lived, but has warned officials must guard against the opposite possibility.

Some officials have also been troubled by price increases in services, which are not directly affected by tariffs.

“The trade shock and the immigration shock are two shocks that are making it very difficult for them to manage their dual-mandate goals,” said Marc Giannoni, chief US economist at Barclays Capital and former research director at the Dallas Fed. “And so the direction of policy is not clear.”