The Fed Meets Again This Week to Set Interest Rates. 5 Things to Watch.

The Federal Reserve is expected to cut interest rates by a quarter of a percentage point this week, although some Fed officials may argue for a half-point cut. (Alex Wong/Getty Images)

Key Points

About This Summary

• The Federal Reserve meets amid mixed economic signals, political drama, and questions about central-bank independence.
• Trump’s nominee Stephen Miran was confirmed to the Fed board, raising concerns about Fed independence and future policy.
• A quarter percentage point rate cut is likely, but some favor a larger cut due to weak jobs data and cooling labor conditions.

The Federal Reserve’s policy committee meets on Sept. 16-17 under unusual circumstances that go far beyond expectations for an interest-rate cut. Mixed economic signals, political drama, and questions about central-bank independence from White House interference all form the backdrop of what could be one of the most consequential Federal Open Market Committee meetings of this year—or any year.

In addition to voting on any change in the federal-funds rate, currently in a target range of 4.25%-4.50%, FOMC members will provide near- and longer term forecasts for gross domestic product growth, unemployment, inflation, and the federal-funds rate. The quarterly Summary of Economic Projections will be released when the meeting ends at 2 p.m. Eastern on Wednesday afternoon, and Fed Chair Jerome Powell will hold a press conference at 2:30.

Here are five things to know ahead of “Fed Day.”

Fed governor Lisa Cook plans to attend the FOMC meeting, despite her legal battle. Cook, nominated to the Fed board of governors in 2022 by former President Joe Biden, will likely participate in the September meeting, even as she fights President Donald Trump’s attempt to remove her from the board over allegations of mortgage fraud. A federal judge temporarily blocked her dismissal, and her lawyers say she will continue performing her duties.

Trump tried to fire Cook earlier this summer based on allegations from Federal Housing Finance Agency director Bill Pulte that she committed mortgage fraud by declaring two properties as her primary residence on loan applications. The allegations center on mortgage documents relating to properties in Michigan and Georgia that she obtained in 2021, before joining the Fed. Cook hasn’t been charged with any crime.

Trump’s broader goal appears to be reshaping the Fed board. The president, who has publicly derided Powell for not lowering interest rates, said last month that he would soon have a majority of his nominees on the Fed’s board of governors, who would work to slash interest rates. “We’ll have a majority very shortly,” Trump said during a televised cabinet meeting. “So that’ll be great.”

The Cook fight puts the Fed in uncharted waters in more ways than one. Cook will join Fed colleagues at the same table while actively challenging her dismissal in court. Trump’s team is appealing the judge’s decision, but for now Cook remains a voting member of the FOMC.

The Trump administration, meanwhile, was unsuccessful in its attempt to sideline Cook before this week’s policy meeting. A federal appeals court on Monday evening denied the government’s request to pause the lower-court order that restored her to the central bank’s board.

The unprecedented situation raises questions about how the legal uncertainty might affect Cook’s participation in policy discussions or her voting decisions.

Council of Economic Advisers Chair Stephen Miran will join the Fed Board. The Senate confirmed Trump’s Fed nominee, Miran, on Monday evening with a vote of 48-47. Miran was nominated to fill the seat left vacant by former Fed governor Adriana Kugler, who resigned in early August.

Miran has served as chair of the Council of Economic Advisers in the second Trump administration, and is a close ally of the president’s. He has said he supports looser monetary policy, and told lawmakers that tariff-related inflation pressures have been limited. But his confirmation has raised fresh concerns about Fed independence.

In the past, Miran proposed nationalizing the regional Federal Reserve Banks and making all board members at-will employees whom the president can fire at any time. Luis Alvarado, a global fixed-income strategist at Wells Fargo Investment Institute, called Miran’s nomination a “strategic move by the Trump administration to advance its economic agenda while also maintaining flexibility for future appointments.” Miran will fill a term that expires at the end of January.

A quarter-point rate cut is likely, but doves will push for more. The Fed will likely cut rates by a quarter percentage point next week, the first cut since last December. But two Fed governors dissented against the rate decision at the July meeting, in favor of cutting rates then, and those who favor a looser policy may argue for a larger cut now. Recent economic data, particularly the weak August jobs report, have strengthened the case for more aggressive easing.

Neil Dutta, head of economic research at Renaissance Macro, thinks the Fed should cut by half a percentage point, but doesn’t expect that will happen. “The doves on the FOMC have a very strong case to make and we should anticipate dissents in the direction of a larger upfront move,” he wrote in a note last week.

Labor market conditions are cooling faster than earlier this year, with underemployment rising more quickly than the unemployment rate, he said. Tariff pass-through, meanwhile, has been smaller than expected and inflation expectations remain relatively anchored despite trade policy uncertainty.

The Fed is “a consensus institution,” said Dutta. That means that even though a half-percentage-point cut would be “a bridge too far for the policy hawks,” doves will be able to negotiate for other concessions.

They could push for stronger language acknowledging labor market weakness, and that strips the description of job market conditions as “solid.” Doves could also demand the Fed formally acknowledge that it is becoming more attentive to downside risks to employment.

Analysts at Morgan Stanley expect that Miran, if confirmed in time, will dissent in favor of a larger rate cut. That would result, they wrote, in a clearer easing bias in the future.

Economic projections will signal future policy moves. The Fed will release updated economic projections next week that include the closely watched dot plot, a chart showing where each voting member expects interest rates to be at the end of this year, next year, and thereafter. This quarterly snapshot gives markets important insights into how aggressively the Fed plans to cut rates in the future.

Based on June projections, officials expected two quarter-point cuts this year. But that consensus may be shifting after employment data revisions. Morgan Stanley analysts expect the dot plot to remain the same this year, but to show an additional half percentage point of easing in 2026.

The projections may reflect fewer than the usual 19 FOMC participants if Miran doesn’t submit his forecasts in time. While there is little precedent for this situation, too, history offers a truncated guide. When Lael Brainard was confirmed as a Fed governor just days before an FOMC meeting in June 2014, she didn’t submit projections for that meeting’s SEP. If Miran manages to get his forecasts in, they will likely reflect views aligned with the Trump administration’s preference for aggressive rate cuts.

The June projections showed a divided committee, with seven officials expecting no cuts this year and eight projecting half a percentage point of easing. Recent employment data may have pushed more officials toward the dovish camp, but tariff concerns could keep some cautious about cutting too aggressively.

Mixed economic signals will complicate rate decisions this month. The Fed is weighing conflicting data that will make policy choices more difficult. While employment growth has weakened, other economic indicators remain healthy. Consumer spending appears solid, with restaurant bookings, air travel, and retail sales holding up well.

The jobs picture has deteriorated significantly in the past few months. The Bureau of Labor Statistics reported on Tuesday that it marked down previously reported net payroll gains by 911,000 in the 12 months through March. That means the U.S. economy created only 847,000 jobs in the period, not the 1.8 million positions originally reported. On Thursday, weekly unemployment claims grew by 27,000 to 263,000, the highest level since October 2021.

Inflation also ticked up in August, although not by enough to thwart expectations that the Fed will lower interest rates this month. Annual growth in the consumer price index is now nearly a full percentage point higher than the Fed’s 2% target, even as payroll growth is hitting stall speed.

That combination—which equates to mild stagflation—is a challenge for Fed officials, who must balance the central bank’s dual mandate of maximum employment and price stability. If the Fed cuts rates too quickly, inflation pressures could continue to grow.

Fed officials will have to balance concerns about a rapidly cooling labor market against the risk that cutting rates too quickly could reignite inflation pressures that have proven more stubborn than expected.

Stocks are trading at or near all-time highs, depending on the index measured, while bond yields rose only slightly Friday. That suggests investors expect the Fed to do the right thing, whatever that may be.

Write to Nicole Goodkind at nicole.goodkind@barrons.com