By Greg Robb
Fed majority is seen as still on the fence and divided about September action
Fed Chair Jerome Powell may try to temper expectations of a rate cut in September.
Federal Reserve Chair Jerome Powell is likely to push back on growing investor expectations for a September interest-rate cut, as the rate-setting committee is still divided over its next move.
Revisions that revealed weak payroll growth in the latest jobs report, combined with data indicating that inflation isn’t rising as quickly as expected, have convinced market participants that Powell won’t be able to hold off on a rate cut any longer. Unrelenting pressure from the White House and from Treasury Secretary Scott Bessent has upped the stakes. The Fed has held rates steady this far this year, worried that higher inflation would appear.
Using data from the Atlanta Fed, the market now sees a 65% chance of a quarter-point rate cut in December and a 15% chance of a half-point cut.
But Powell may try to temper those expectations, experts say. The Fed chair doesn’t want the market to think a rate cut is a done deal. If the market prices in a cut right before the Fed meets on Sept. 16-17, it would be really hard for the central bank to decide to keep rates on hold, said Ethan Harris, a former chief economist at Bank of America Securities.
The Fed doesn’t like to surprise markets on decision days, he said.
“The biggest thing to watch now is … are [Fed officials] going to push back on market expectations,” said Ellen Zentner, chief economic strategist at Morgan Stanley Wealth Management. Fed officials who don’t favor a September rate cut are expected to speak publicly as well.
“If they think the market is wrong, they will go out there, because they’ve got a job to do to talk down the market,” she added.
All eyes on Jackson Hole?
Harris said he thinks Powell will use his Jackson Hole speech to suggest that a rate cut in September remains uncertain. Powell is expected to speak on Aug. 22 from the central bank’s annual summer retreat.
Jackson Hole has grown in importance as a “quasi” meeting of the Fed interest-rate committee.
Still, Zentner doesn’t think the Fed will end up countering market expectations with its decision. She thinks the Fed will decide to cut interest rates by 25 basis points in September, with the only pushback being to take a half-point cut off the table.
This week, Bessent openly called for the Fed to cut rates by 50 basis points in September as the start of a series of cuts that would bring the federal-funds rate down by 150-175 basis points. The Fed’s benchmark rate is now in a range of 4.25%-4.5%.
Robert Brusca, president of FAO Economics and a former New York Fed staffer, said the Treasury secretary’s comments were designed to keep maximum pressure on Powell.
Harris thinks the idea of a 50-basis-point cut will continue to percolate. Republicans will argue that the Fed should cut by 50 basis points, just as it did last September when officials were worried about the labor market.
But economists said there are big differences between this year and last – most obviously the steep rise in tariffs on imported goods.
Michael Gapen, chief economist at Morgan Stanley, said a 50-basis-point cut would only be on the table if the Fed was worried the economy was headed toward a recession.
There will be dissents
Gone are the days when the Fed moved in lockstep, Harris said. The July dissents in favor of rate cuts by two Fed governors appointed by President Donald Trump – Christopher Waller and Michelle Bowman – have “broken the ice,” he said.
That means there will be dissents no matter what the central bank decides to do.
At the moment, neither Fed hawks, who support holding rates steady, nor doves, who support easing, have a majority. Most Fed officials are in the middle, said Stephen Ricchiuto, chief economist at Mizuho Securities.
The debate at the central bank is over whether it makes sense to cut rates to support a weakening labor market. In normal times, the Fed might take this step, but hawks worry that there is a big risk of a surge in inflation.
Hawks don’t think the labor market is as weak as their colleagues do.
“I would expect to see a pretty active hawk-versus-dove debate going forward until we get to the September meeting, throwing a little bit of doubt into the cut,” Harris said.
“The hawks are not going to roll over,” he added.
Harris said the data this month would justify a 25-basis-point cut.
Wall Street economists are also split.
Bill Adams, chief economist at Comerica, thinks the Fed will remain on hold in September, and Matt Luzzetti, chief U.S. economist at Deutsche Bank, sees the Fed on hold until December. But both said it is a close call.
Many economists said the decision will depend on the August jobs report and on inflation data to be released before the Fed interest-rate committee next meets.
-Greg Robb
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08-13-25 1642ET
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