Months of speculation will come to a head tomorrow afternoon when the Federal Reserve announces its latest interest rate decision.
Will it reduce rates? If so, by how much? How cautious will Fed Chair Jerome Powell be when he addresses the media? How will the markets react?
The answers to all of these crucial questions are less than 24 hours away.
To help cut through the noise, I’ve asked our top two experts here in Wealthy Retirement – Chief Income Strategist Marc Lichtenfeld and Director of Trading Anthony Summers – two simple questions: What should the Fed do… and what will it do?
What should the Fed do?
Marc: I’ve mentioned several times in the past that the Fed has two mandates. The first is to keep inflation in check. The second is to maintain full employment.
While President Trump has railed against Powell to lower interest rates, Powell has defied him, saying he wouldn’t do so until the data showed that rate cuts are warranted.
They now are.
Ask anyone whether inflation is under control, and they’ll tell you no. The consumer price index’s 0.4% rise in August and 2.9% increase year over year confirm that.
Jobs are deteriorating too. The Bureau of Labor Statistics said last Tuesday that there were 911,000 fewer nonfarm payroll jobs than previously reported. For the week ending September 6, there were 263,000 new unemployment claims, the most in four years.
A 25-basis-point rate cut to a range of 4% to 4.25% seems appropriate at this point.
Anthony: The Fed should cut by a quarter-point, or 25 basis points.
On the surface, the job market is softening – though there’s data that suggests the slowdown is somewhat concentrated in certain sectors – and overall economic growth looks shaky. But while inflation isn’t raging anymore, it’s not low either.
In this mix, tight policy could be doing more harm than good. A small cut supports hiring and cash flow for Main Street. It also offsets tariff drag that can slow demand.
All the Fed really needs to do right now is help the job market while keeping a close eye on prices. If inflation flares, pause. If hiring continues to weaken, cut once more.
Keep the mission simple, yet steady. That approach reduces recession risk without inviting a price spiral. It also keeps credit markets open for households and small firms.
What will the Fed do?
Marc: I suspect the Fed will cut rates by 25 basis points. That’s not going to suddenly spark hiring, but it does put America on notice that rates are likely going to continue coming down. It’s a warning shot across the bow.
A 50-basis-point cut at this point would feel alarmist. If inflation was abnormally low, 50 basis points might make sense, but with the prices of everything from rent to food to TV subscriptions going higher (regardless of what the government data shows), not to mention the effect of tariffs, lowering rates too quickly could result in rip-roaring inflation.
The Fed has a balancing act to conduct. It needs to lower rates enough to fuel jobs, but not so much that it fans the inflation flames. It’s not an easy thing to manage.
Anthony: I think the Fed will likely do what it should do.
The most probable move is a 25-basis-point cut, but officials will stress that future actions will be determined “meeting by meeting.” They will nod to sticky inflation but frame it as manageable, pointing to softer hiring and cooler growth as the bigger risks today.
That opens the door to another cut if jobs data stays weak. They will not pre-commit to back-to-back moves – nor should they – but they will not rule it out either.
Tariff concerns will get a mention as a headwind. The Fed will avoid big promises about next year’s fiscal plans; that is outside its lane. So I’d expect a cautious tone and a split vote or two.
Markets will hear “one cut now, maybe more to come.” If the next jobs report disappoints, odds are the Fed will follow up with a cut. If inflation pops higher, the Fed will likely pause.
Marc and Anthony both expect a quarter-point cut tomorrow, but not everyone sees it the same way.
A columnist in the Financial Times argued last week that a rate cut would be an “alarmist reflex” and that “there is an equally strong case for a rate increase.”
On the other hand, British bank Standard Chartered supports a sizable reduction, writing that the slowing job market “has paved the way for a ‘catch-up’ 50-basis-point rate cut.”
However, the majority of economists agree with Marc and Anthony that a 25-basis-point reduction is both the most prudent and the most likely outcome.
Will they be right? We’ll know in less than 24 hours.
What do you think the Fed should do? More importantly, what will it do? Are you excited? Are you concerned? Let us know your thoughts in the comments below!