"Fed's September Meeting Unveils a Deepening Policy Divide"

The Federal Open Market Committee (FOMC) is poised to face significant internal division during its September 16–17 meeting, as three members are expected to advocate for maintaining interest rates unchanged, potentially challenging the broader consensus to reduce rates by a quarter point. This divergence highlights the growing complexity in the Fed’s decision-making process, as inflation risks and labor market weaknesses continue to shape policy debates.

According to forecasts, the Fed is expected to cut rates by 25 basis points, a move that will not be unanimous. Three FOMC members—Kansas City Fed President Jeff Schmid, Cleveland Fed President Beth Hammack, and Chicago Fed President Austan Goolsbee—have expressed a preference for holding rates steady. Their stance reflects concerns that recent inflationary pressures, partly driven by Trump administration tariffs, could become entrenched and undermine the Fed’s long-term credibility. These officials argue that the recent uptick in inflation, particularly in heavily imported goods, poses a risk of normalizing higher price growth.

Conversely, several members are pushing for more aggressive rate cuts. Governors Chris Waller and Michelle Bowman are expected to dissent in favor of a 50-basis-point reduction, with Waller having already signaled this position. Joining them will be Stephan Miran, who recently assumed a temporary seat on the FOMC. Miran has been vocal in advocating for additional easing, particularly given his belief that the Fed’s policy rate remains more restrictive than previously estimated. His influence may be limited, however, as market participants have historically discounted his views due to his political appointment.

The FOMC is also scheduled to release its Summary of Economic Projections (SEP), which is expected to show that most members anticipate three rate cuts in 2025, beginning in September. The projections will likely reflect a modest downward revision in the central bank’s estimate of the neutral rate, further justifying the need for easing. However, debates over the pace and magnitude of these cuts are expected to intensify, particularly in light of the broader economic uncertainties.

Analysts note that the Fed’s balancing act between inflation and employment is becoming increasingly difficult. While the labor market has shown signs of weakening—most notably a marked slowdown in hiring—the risk of inflationary pressures rising again is a concern for policymakers. The current policy environment is complicated by the delayed effects of previous tightening cycles, as well as the lingering impact of pandemic-era inflation. The Fed’s credibility has been further strained by the perception that its response to inflation has been late and insufficient, raising fears of a self-fulfilling cycle of inflation expectations.

Market participants are closely watching for any signals regarding the path of future rate cuts. The CME FedWatch tool indicates a 96% probability of a 25-basis-point reduction in September, with only a 4% chance of a larger 50-basis-point cut. Economists will also pay attention to whether the FOMC provides clear guidance on the timing of subsequent rate cuts, particularly in October and December. Any ambiguity could lead to volatility in financial markets, which have priced in a significant easing cycle for the remainder of the year.

The internal divisions within the FOMC underscore the broader challenges facing monetary policy in an environment of diverging economic indicators and political pressures. The Fed’s ability to maintain its independence while addressing these conflicting demands will be critical in determining the effectiveness of its future policy actions.