America's central bank, the Federal Reserve, is on the brink of implementing its first rate cut of 2025 during its sixth meeting of the year. Previously, the Fed has opted to keep interest rates steady, but recent economic indicators suggest a shift is imminent. The upcoming decision on Wednesday is not guaranteed, but the CME FedWatch tool estimates a near-100% likelihood of a rate cut.
This anticipated meeting follows a series of troubling economic reports, including sluggish job growth, a gradual rise in unemployment rates, and inflation rates that are beginning to creep upwards again. President Donald Trump has been vocal in his criticism of Fed Chair Jerome Powell, repeatedly calling for a rate cut and questioning the leadership of the central bank. In response, Powell has emphasized that his decisions will strictly adhere to the Fed's dual mandate of ensuring maximum employment and maintaining stable prices.
In his recent keynote address at Jackson Hole, Powell hinted at a potential policy shift, stating, "While the labor market appears to be in balance, it is a curious kind of balance that results from a marked slowing in both the supply of and demand for workers." He noted that with policies currently in restrictive territory, the evolving economic landscape might necessitate an adjustment to their policy stance.
The expected rate cut could provide much-needed relief for borrowers and may positively affect American consumers. This is particularly relevant for individuals looking to purchase homes, buy cars, or take out loans. However, financial analyst Stephen Kates from Bankrate cautions that this should not be viewed as a sign of economic prosperity. "This isn't the victory parade over conquering inflation," Kates remarked. "This is a potential cut due to a faltering economy, which is concerning."
The Fed's decision will hinge on various economic indicators, which have a direct impact on consumers. As of August, the consumer price index rose by 2.9% year-over-year, marking its highest increase since January. This is an uptick from a recent low of 2.3% in April. Meanwhile, the GDP is gradually recovering from a plateau earlier in the year, although a key consumer sentiment marker showed a decline this month.
In terms of the labor market, the U.S. added significantly fewer jobs than anticipated in both July and August, with June’s figures also revised to reflect a slight decline—the first job loss recorded since December 2020. While layoffs and unemployment rates remain historically low, companies are showing hesitancy to hire, and employees are clinging to their current positions. Many white-collar job seekers have expressed frustration over limited opportunities, as reported by Business Insider.
Typically, the Fed opts to cut rates to stimulate a slowing economy; however, Powell has adopted a cautious approach regarding Trump's trade policies. In a July meeting, Governors Christopher Waller and Michelle Bowman dissented against holding rates steady, suggesting that the current economic conditions warranted a shift towards cuts.
Many investors are advocating for at least a quarter-point cut, especially after Powell's Jackson Hole speech resulted in market surges. However, Kates emphasizes that a single rate cut will not drastically affect consumer borrowing. Though 30-year fixed-rate mortgages, two-year auto loans, and credit card rates generally align with the federal funds rate, external factors like inflation and investor behavior also play critical roles in determining borrowing costs.
Kates further explains that while a rate cut would benefit borrowers, it may simultaneously lower the gains for savers. Personal finance expert Sean Pyles from NerdWallet notes that credit card rates typically decrease following a Fed rate cut, but the effects may take months or several billing cycles to manifest.
The Trump administration has been relentless in its push for a rate cut, with Trump often criticizing Powell online. In a recent post, he referred to Powell as "Jerome 'Too Late' Powell," emphasizing that he should have acted sooner. Furthermore, Trump has suggested that Powell should resign and has even hinted at the possibility of firing him. Economists have warned that an unexpected change in Fed leadership could lead to market turmoil.
Powell's current term is set to expire in May, and other members of the Fed are facing similar scrutiny. Trump has called for Fed Governor Lisa Cook to resign, alleging mortgage fraud—a claim that her attorneys have denied. Despite the pressure, Cook remains in her position, and a recent Reuters report clarified that her second property was listed as a vacation home, countering the allegations.
