This is the reason why the Fed will cut interest rates for the first time in nine months

The U.S.’s Federal Reserve is overwhelmingly expected to lower interest rates at this week’s meeting of the Federal Open Market Committee (FOMC), ending a nine-month period in which the central bank has maintained a steady rate.

The anticipated move comes against the backdrop of disappointing employment numbers in the U.S., with the country’s Bureau of Labor Statistics reporting earlier this month that just 22,000 jobs were added to the American economy in August.

How much will the Fed drop interest rates by?

Led by Fed chairman Jerome Powell, the FMOC is meeting over two days this week, with its interest-rates decision due to be announced at 2:00 p.m. ET/11:00 a.m. PT on Wednesday, September 17.

Such are the expectations that the Fed will reduce interest rates that CME Group’s FedWatch forecaster reports a 100% chance that the current rate of 4.25% to 4.50% will be cut. Per CME Group, there is a 96.1% possibility of a 0.25% reduction, while the prospects of a larger, 0.50% drop are rated at 3.9%.

How would an interest-rate cut help the job market?

As the Federal Reserve outlines in its mission statement, one of the body’s two key responsibilities is to “promote maximum employment”.

The Fed can do this by keeping interest rates down, which makes it cheaper for businesses and consumers to borrow money. This should, in turn, encourage economic activity and create an environment in which companies are likelier to be hiring.

Given that the U.S.’s latest jobs report continued a four-month run of poor employment figures, observers agree with CME Group’s assessment that an interest-rate cut now appears inevitable.

“The fourth month of sub-par employment performance signals a dramatic stall in hiring and fully supports the Fed starting rate cuts at the next meeting,” Nationwide chief economist Kathy Bostjancic said earlier this month, per USA Today. Now, Bostjancic added, the “real question” is how many further rate drops the Fed will implement in the coming months.

Trump: Fed “must cut interest rates, now”

Donald Trump is certainly eager for the Fed to bring interest rates down. Indeed, the U.S. president has repeatedly railed against the central bank’s decision to leave rates unchanged in recent months, branding Powell “very stupid” and “incompetent”, and nicknaming the 72-year-old “Too Late”.

Notably, Trump has pushed for cheaper borrowing to boost the U.S.’s housing market.

In a caps-heavy post on his Truth Social social-media platform on Monday, Trump urged the Fed to drop rates by a greater margin than expected in its Wednesday announcement. “‘Too Late’ MUST CUT INTEREST RATES, NOW, AND BIGGER THAN HE HAD IN MIND,” the president said. “HOUSING WILL SOAR!!!”

Is there a downside to dropping interest rates?

Yes: lowering interest rates comes with a significant potential problem, one that is at the heart of the Fed’s second key job. Alongside promoting employment, the central bank notes that it is also responsible for ensuring “stable prices for the American people”, by keeping inflation in check.

The constant conundrum for the Federal Reserve is that boosting jobs and limiting inflation require opposite actions on interest rates. While the Fed can help create jobs by reducing the cost of borrowing and boosting economic activity, this also leads prices to rise, because it increases the level of demand for goods and services.

So to curb inflation, the Fed needs to raise interest rates, or at least keep them above a certain level.

And at present, the inflation rate in the U.S. sits above the Fed’s stated target of 2%.

Although price rises remain well below the 40-year high of mid-2022, inflation has been ticking upwards since April - increasing to 2.9% in August - amid fears that President Trump’s aggressive policy of tariffs on imports will cause an ongoing hike in prices in the U.S.

“The effects of tariffs on consumer prices are now clearly visible,” Powell told a speech at the Fed’s annual symposium in August. “We expect those effects to accumulate over coming months.”

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