Fed prepares to lower rates, with size of first cut in boubt

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Subscribe to enjoy similar stories. The Federal Reserve is set to cut borrowing costs at its two-day meeting that ends Wednesday. The goal: preserve a solid job market now that price pressures have cooled.

The decision over whether to cut the Fed’s benchmark interest rate, currently at a two-decade high between 5.25% and 5.5%, by either a larger half percentage point or by a traditional quarter point will come down to how Chair Jerome Powell leads his colleagues through a finely balanced set of considerations. Economic data over the past several months show inflation has resumed a steady decline to the Fed’s 2% goal. But the labor market has cooled, with the unemployment rate edging up to 4.2% in August from 3.7% at the end of last year.

Monthly payroll growth has slowed to 116,000, on average, for the three months through August, down from 212,000 in December 2023. “The key issue for them at this meeting is their sense of the balance of risks," said William English, a former senior Fed adviser. “If you are more worried now about growth and employment than inflation, then you might well want to take out a little bit of insurance" with a larger cut of a half point, or 50 basis points.

The argument for a smaller cut of a quarter point, or 25 basis points, rests on different considerations, including that the economy is fundamentally fine or that cutting too fast could stoke risk-taking that sustains higher inflation. “If they’re not convinced that inflation is really as good as the recent data has suggested, they may still be worried that the battle against inflation will be more protracted and uncomfortable," said English, a professor at Yale School of Management. English said a few weeks ago he thought a smaller cut