Federal Reserve Expected to Cut Rates by 0.25% Amid Political Turmoil

As the newly appointed member of the Federal Reserve Board, Milan, took the oath of office on Tuesday, a Federal Reserve meeting filled with unusual elements officially began.

Nick Timiraos, a renowned macroeconomic author known as the "mouthpiece of the Federal Reserve," stated on Tuesday that due to the recent slowdown in employment growth, Federal Reserve officials are widely expected to lower the interest rate by 0.25 percentage points at the end of the Wednesday meeting, bringing it to the 4%-4.25% range. Powell had already hinted at this decision last month, placing more emphasis on employment issues than inflation.

Therefore, this week, the focus is not on the rate cut itself, but on the positions expressed by various parties.

Timiraos pointed out that this meeting comes at an unprecedented political moment for the Federal Reserve, making it one of the most unusual in recent years. Previously, Trump had criticized the Federal Reserve's reluctance to cut rates for months, and there was also a legal controversy surrounding the dismissal of Federal Reserve Governor Lisa Cook.

On Monday local time, a federal appeals court maintained a 2-1 split decision to uphold an injunction allowing Cook to attend this week's meeting. According to the seating arrangement, she will share the same corner of the Federal Reserve meeting table with Milan, with only one member between them.

Since the rate cut is a foregone conclusion, investors will closely monitor potential changes in the "dot plot": will Powell and his colleagues set the total number of rate cuts for this year at three, or will they maintain the two expected in June? At the awkward September juncture, officials must specify where they expect the end-of-year rate to be, and these forecasts are essentially predictions of the Federal Reserve's actions in the last two meetings of the year (October and December).

Since the last Federal Reserve meeting, the employment situation in the United States has changed significantly. At that time, the number of new jobs created in the three months ending in June reached 150,000, but this number was later revised down to 96,000. In the three months ending in August, the average number of jobs fell sharply to 29,000.

Former Dallas Federal Reserve President Kaplan interpreted that everyone knows the labor market is weakening, so there will be a lot of discussion in the meeting about "how much the labor market is weakening." Kaplan further stated that his conversations with businesses have led him to believe that while the current U.S. economy is significantly weaker, it has not yet collapsed, which means that caution should be exercised when committing to a series of rate cuts.

At the July meeting, the Federal Reserve kept the interest rate unchanged due to concerns about inflation being more severe than employment market risks. However, Powell also said after the meeting that if "both risks are balanced, it means you should move towards a more neutral policy stance."

This raises the next question: where is the current neutral rate?

As the policy rate that is theoretically neither stimulative nor restrictive of economic growth, the neutral rate is not even a fixed value. Although Federal Reserve officials recently estimated the neutral rate to be 3%, they have been raising this estimate over the past few years. Kaplan, who is more cautious about rate cuts, believes the current neutral rate should be around 3.5%, meaning the Federal Reserve would only need to cut rates 3-4 times by 25 basis points to reach it.

Timiraos also pointed out that given the current inflation situation, compared to this time last year (when Powell cut rates by 50 basis points at once), more officials may believe that a large rate cut is not advisable. There may even be a few officials who have no enthusiasm for rate cuts.

Former Kansas City Federal Reserve President Esther George said, "The current unemployment rate is 4.3%, inflation is far above the target, and the financial environment is loose. Advocating for rate cuts just to stimulate current economic demand is a bit of a stretch."

Given the increasingly complex positions and factions within the Federal Reserve, it is also worth noting what additional signals Powell will send beyond rate cuts. In his Jackson Hole speech, Powell showed more concern about the weakening labor market than his colleagues. The question now is whether he will increase this concern in the face of the weaker August employment report—undoubtedly, this will require overcoming the concerns of his "hawkish" colleagues.

In addition to these complex issues, Powell also faces the pressure of maintaining the independence of the Federal Reserve.