Anticipated Announcement
This week, the Federal Reserve will probably announce its first rate cut of 2025.
The Fed meeting comes as job growth has slowed, unemployment has risen, and inflation rates have gone up.
A rate drop might make it cheaper to borrow money, but it won’t have a big effect on Americans’ mortgages or credit.
Background on the Federal Reserve’s Decision
Previous Meetings
The Federal Reserve of the United States is likely about to make its first rate cut of 2025.
This is the sixth time this year that the Federal Reserve has met. They’ve kept rates stable at every meeting in 2025 so far, but that’s about to change.
The decision on Wednesday isn’t set in stone, but CME FedWatch says there’s a very high possibility of a cut.
Economic Indicators
The meeting comes after a few monthly reports that showed job growth slowing, unemployment rising slowly, and inflation statistics going back up.
President Donald Trump has put Jerome Powell, the head of the Federal Reserve, in a tough spot by regularly pushing for a rate cut and criticizing the way the central bank is run.
Powell has said that the Fed’s two basic goals of maximum employment and stable prices will be the only things that guide his decisions.
Powell’s Stance
Jackson Hole Speech
In his speech at Jackson Hole last month, Powell hinted that the Fed might be ready to shift its policies.
“While the labor market seems to be in balance, it’s a strange kind of balance that comes from a big drop in both the supply of and demand for workers,” Powell said.
“With policy in restrictive territory, the baseline outlook and the changing balance of risks may call for us to change our policy stance.”
Potential Impact of the Rate Cut
Borrowers and Consumers
The predicted drop could help borrowers and eventually help American consumers, especially those who want to buy homes, vehicles, take out loans, or use credit cards.
But Stephen Kates, a financial analyst at Bankrate, said it won’t mean that the economy is doing well or that people are happy.
Kates stated, “This isn’t the victory parade for beating inflation.”
“This could lead to a cut because the economy isn’t doing well, and that’s not always a good thing.”
Economic Factors Driving the Decision
Inflation and GDP
The Fed will decide what to do with interest rates based on a number of economic variables, many of which have a direct effect on consumers.
The consumer price index, which is one way to assess inflation, was up 2.9% from August to August, the highest pace since January. That’s higher than its recent low of 2.3% in April.
GDP is getting better after being stuck at a standstill earlier this year, and a key sign of how consumers feel fell this month.
Job Market Trends
The US added a lot fewer jobs than predicted in both July and August, which is not good for the employment market.
There was also a modest drop in June, which was the first loss since December 2020.
Even while layoffs and unemployment are at all-time lows, employers are hesitant to hire, people are holding on to their current jobs, and Business Insider has heard from white-collar job seekers who are dissatisfied by the lack of options.
Internal Fed Disagreements
Differing Opinions
The Fed usually lowers interest rates to boost a weakening economy, but Powell has been waiting to see what Trump does about trade.
In July, Governors Christopher Waller and Michelle Bowman disagreed with the hold call because “excluding temporary effects of tariffs, a labor market near full employment but with signs of less dynamism, and slowing economic growth this year” showed that it was time to start making cuts, according to a note from Bowman in the meeting minutes.
A lot of investors have also said they want at least a quarter-point cut, and the markets went up after Powell’s speech in Jackson Hole.
Limited Consumer Impact
Housing, Auto Loans, and Credit
There won’t be a big change in housing, cars, or credit with just one rate drop.
Kates noted that rate reduction can help borrowers, but that one change wouldn’t have a big influence on consumers.
The federal funds rate affects the rates for 30-year fixed mortgages, 2-year auto loans, and credit cards. However, inflation and how investors act can also have a big effect on how much it costs to borrow money.
It may take some time and several actions by the Fed for those rates that affect consumers to change.
Kates added that a decrease in September wouldn’t immediately lower rates “because some of that has already happened in anticipation of the actual event.”
That’s how mortgage rates have been: the 30-year fixed-rate mortgage has mostly been going down this summer.
Borrowers vs. Savers
A rate drop would be good for borrowers, but it would probably hurt savers.
Sean Pyles, a personal finance expert at NerdWallet, told Business Insider that “consumers should care about this rate cut because it could make debt more affordable.”
However, it could also lower the yield on savings accounts and certificates of deposit.
Pyles stated that when the Fed reduces the federal funds rate, credit card rates usually go down, but this can take months or even multiple billing cycles to happen.
Longer-Term Effects
The one decision in September is unlikely to have a big impact on how much it costs for consumers to borrow money.
Instead, it will probably take several rate drops over the next few months.
Mark Hamrick, Bankrate’s senior economic analyst, said that a modest drop of 25 basis points “would not have huge effects on the lives of most Americans” because the threshold would still be strict.
“However, if this is the start of a long-term campaign to lower rates, that would be more important because it would help the economy and maybe the housing market,” Hamrick added.
Political Pressure from the White House
Trump’s Push for Rate Cuts
The Trump administration has been lobbying for a rate drop for months.
The president routinely posts online about how bad Powell is.
“Jerome ‘Too Late’ Powell should have cut rates a long time ago,” Trump tweeted on Truth Social on September 5.
“As usual, he’s ‘Too Late!'”
The president has also ordered Powell to quit and talked about dismissing him, even though analysts told Business Insider that a sudden change in Fed leadership would throw markets into a tailspin.
May is the end of Powell’s official term.
Pressure on Other Fed Officials
Other members of the Federal Reserve have also been under a lot of strain.
Trump told Fed Governor Lisa Cook to step down recently, saying she was involved in mortgage fraud.
Cook’s lawyers dismissed the claim, and she is still in her seat.
On September 13, Reuters reported that paperwork showed her second house was categorized as a vacation home, not a regular residence, which goes against what others were saying.
Changes in Leadership
The president also has a voice in who will replace Adriana Kugler as Fed Governor. She announced her resignation in August.
Trump chose Stephen Miran, the head of the White House’s Council of Economic Advisors, to take her post.
Over time, Trump’s changes to the Fed’s open market committee might give the White House more power over monetary policy.
