Federal Reserve policymakers find themselves at the center of a spirited debate as the U.S. economy heads into autumn. With inflation running at 2.7 percent as of July and labor market data sending mixed signals, economists and market strategists are divided on whether the central bank will hold, raise, or lower benchmark interest rates in the coming months.
A majority of economists, surveyed by Reuters in mid-August, expect the Fed will lower its key interest rate in September for the first time this year, with another potential reduction before year-end. Sixty-one percent of respondents forecast a 25-basis point cut in September, reflecting rising concerns about economic stability and recent downward revisions to employment figures. A weakening labor market and the softer trajectory for inflation bolster the case for a cut believes Mark Zandi, chief economist at Moody’s Analytics.
Still, dissent is notable. More than a third of the economists in the poll expect the Federal Open Market Committee (FOMC) to keep rates unchanged. “We think that market participants are excessively confident in a September cut, as they are misinterpreting both the FOMC’s assessment of labor market conditions and its reaction function,” wrote Barclays economists in a recent note. They argue that despite mounting political pressure for lower borrowing costs—President Trump has taken to social media to criticize Fed Chair Jerome Powell—the Fed remains hesitant, concerned that core inflation, measured at 2.8 percent, is still above target.
Wall Street itself appears to have one foot in each camp. The CME FedWatch tool puts the probability of a 25-basis point rate reduction in September at above 90 percent, with additional rate cuts seen as likely in October and December if inflation moderates further and employment softens. High-profile strategists such as Goldman Sachs’ Alexandra Wilson-Elizondo wrote in an email that “tariffs have yet to drive substantial price increases, as companies continue to offset cost pressures by drawing down inventories and adjusting prices cautiously due to perceived consumer price sensitivity… with inflation contained and labor market softness increasingly evident in revised payroll data, the emphasis will now be skewed toward employment,” suggesting the Fed’s window to act preemptively is narrow. “This inflation print supports the narrative of an insurance rate cut in September, which will be a key driving force for the markets,” she wrote.
The central bank’s own projections offer little clarity. The Fed held the funds rate steady at 4.25 percent-4.5 percent in July, with two dissenters calling for a rate cut—the first such split since 1993. Policymakers continue to signal a wait-and-see approach, emphasizing data dependency and the ongoing assessment of “the balance of risks.”
Reflecting this caution, Selma Hepp, chief economist at real estate analysis firm Cotality (formally CoreLogic) said, “The Fed is trying to straddle keeping inflation moving towards the target and ensuring employment doesn’t cool considerably more—not an easy task given the current policy context,” Hepp said in a statement. “One thing is for certain, interest rates are highly unlikely to dip down to 2021 levels, when rates hovered around 3 percent. We foresee a 6 percent mortgage rate, or higher, to be the new normal for the 30-year fixed mortgage for the next two years.”
For now, the consensus tilts towards a rate cut in September, supported by both market pricing and a growing cohort of forecasters. Yet, the path beyond remains murky. As one senior Wall Street rates strategist said, “This Fed has shown it will not hesitate to reverse course, but it wants hard data before moving.”
As the Jackson Hole symposium looms and the next FOMC meeting approaches, investors and economists will be parsing every speech and release for clues—aware that in a volatile year, certainty from the central bank is a commodity in short supply.
