Fed is on the verge of first 2025 cut. The question is whether it will keep going.
The Federal Reserve is widely expected this week to make its first interest rate cut of 2025, but the bigger question for investors is how many more cuts could be on the way as the central bank contends with a weak job market, sticky inflation, and mounting White House pressure.
One clue will come in the form of the Fed’s “dot plot,” a chart updated quarterly that shows each official’s prediction about the direction of the central bank’s benchmark interest rate.
The last dot plot, released in June, revealed a consensus among Fed officials for two cuts this year amid uncertainties about how the Trump administration’s policies on tariffs, immigration, and taxes would impact the economy.
That first cut is expected this Wednesday, and most Fed watchers predict it will be a quarter-percentage-point reduction, marking the first easing of monetary policy since December.
Will policymakers stick with predictions for one more cut in 2025 or get more aggressive amid new signs of labor market weakness? The Fed has two more meetings this year in late October and early December.
The central bank’s decision to keep its benchmark interest rate in the range of 4.25%-4.5% for much of 2025 has tested the patience of President Trump, who is trying to install White House economic adviser Stephen Miran as a Fed governor before Wednesday while removing existing Fed governor Lisa Cook.
Trump has been attacking Fed Chairman Jerome Powell for not cutting rates sooner, repeatedly referring to him as “Too Late.”
Former Cleveland Fed president Loretta Mester said she is “not convinced” one rate cut or many cuts will take pressure off the Fed.
“The president has stated that he wants to get a majority of his people on the board and wants to bring down interest rates pretty aggressively,” she said. “He doesn’t seem to care that much about monetary policy being independent and insulated from short-run political considerations.”
But she does not expect the central bank’s first cut this week to be bigger than 25 basis points as policymakers weigh their dual responsibilities to keep prices stable and maximize employment.
A smaller cut “lessens the degree of restrictiveness, but it’s still restrictive and puts downward pressure on the inflation part of the mandate, while also taking out some insurance on the labor side,” Mester said.
Mester is also not expecting a series of cuts to follow this week’s easing.
“They’re going to have to be looking at the data, going meeting by meeting,” Mester said. “They’ll try to be careful about making sure they’re keeping the balance. If they want to get inflation down, they will need to keep policy somewhat restrictive. If labor market conditions deteriorate materially, then they may move to accommodative policy. But we are not at that point now.”
Wall Street traders, however, are betting that cuts will in fact follow at the meetings in October and December, before the Fed puts things on pause until April.
Luke Tilley, chief economist for Wilmington Trust, expects the Fed to be “noncommittal” this week when it comes to future cuts as the central bank tries to balance weaker job growth with inflation.
But he does predict the Fed will cut three times at each of the next three policy meetings because of weakness in the job market.
In fact, Tilley says he expects six consecutive rate cuts — three to end this year and three to start next year, bringing the Fed’s policy rate down to a range of 2.75% to 3% as it searches for a so-called neutral level designed to neither boost nor push down growth.
“If the Fed is thinking about inflation over the course of a year, you’re not going to have much inflation if you have job losses,” said Tilley, who expects weak labor market numbers coupled with possible negative GDP.
“We expect a fairly weak economy with 50% chance of a recession and 50% chance of job losses.”
The real question, according to Former Kansas City Fed president Esther George, is how the Fed is sizing up the restrictiveness of its policy and what its ultimate aim is.
White House Council of Economic Advisers Chairman Stephen Miran. President Trump’s pick to be the next new Fed governor. REUTERS/Annabelle Gordon/File Photo ·REUTERS / Reuters
Are Fed policymakers beginning to resume a cutting bias, and will they follow through? Or will they be more cautious and say any future moves will be dependent on inflation data?
The latest inflation numbers have led George to believe inflation is stalling around 3%, and she noted that the underlying momentum is concerning, even though tariffs are not producing the burst of price pressures that many expected.
Inflation, measured by the Consumer Price Index, showed “core” prices, excluding volatile food and energy prices, rose 3.1% for the month of August, holding the same level as July.
At the same time, she says that the job market data indicates the labor market may be softer than thought. The job market added only 22,000 jobs in August, weaker than the 75,000 economists expected, with the unemployment rate rising to 4.3% from 4.2%.
This week, “I suspect if you look around the table, there will be people that are going to lean in harder on the labor market mandate than the inflation mandate,” George said.
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