Fed Chair Jerome Powell is facing one of the biggest tests of his tenure: delivering an interest rate cut amid a weakening economy, growing divisions in the US central bank and intensifying pressure from the White House.
On Tuesday and Wednesday, he will have to steer the rate-setting Federal Open Market Committee towards the decision he wants. Futures markets expect that to be a 25 basis-point cut, according to CME Group Data.
It would be the first cut since President Donald Trump returned to office in January. The path following that, however, is fraught with uncertainty.
Sitting at the table inside the Fed's headquarters will be Mr Powell, his possible successor, a top Trump ally, a Fed governor who is in litigation with the President, and four regional Fed presidents whose future seats depend on how successful Mr Trump is at reshaping the board.
“This is a very pivotal meeting in the history of the Fed,” said Gary Richardson, the first official historian of the Federal Reserve System and now a professor at the University of California, Irvine. “There's going to be a series of meetings over the next year that could really have a big influence on the structure of the federal government and on the structure of the international financial system.”
Tension in the air – and the data
Mr Trump is beginning to make inroads on his quest to shape the Fed to his liking. His senior economic adviser Stephen Miran was narrowly confirmed in a US Senate vote late on Monday.
Mr Miran’s appointment has drawn criticism from Democrats, who say the Fed’s longtime political independence is at risk after he said he would keep his job as chairman of the White House’s Council of Economic Advisers, but would take unpaid leave.
Mr Trump also remains in a legal battle with Fed Governor Lisa Cook, who was appointed by former president Joe Biden. Mr Trump has tried to fire her over allegations of mortgage fraud. She is suing his administration and remains in her post.
A US appeals court declined on Monday to allow Mr Trump to fire Ms Cook, setting up a showdown at the Supreme Court. No president has pursued a governor like this since the Fed was founded in 1913.
Although the Fed is expected to deliver a rate cut, it will probably not satisfy Mr Trump. The President on Monday demanded Mr Powell, who he calls “Too Late”, make a steeper cut than whatever may be planned.
Mr Trump is calling for steep interest rate cuts just as significant downwards revisions have sowed doubt on the strength of the job market. At the same time, inflation is picking up as the effects of his tariffs take hold.
“Now you have to put a little more weight on the unemployment rate because the cadence of the payrolls changed,” said Jason Granet, chief investment officer at BNY.
The US central bank has a dual mandate of price stability and maximum employment. The Fed has kept rates steady in the 4.25 to 4.50 per cent target range this year.
Mr Powell delivered a warning in April: “We may find ourselves in the challenging scenario in which our dual-mandate goals are in tension.”
That tension is now here. Mr Powell and the rest of the FOMC must decide which side of their mandate requires the most urgent intention, as the central bank is not designed to tackle both at once. The Fed is hoping tariffs do not cause another inflationary cycle, so it is shifting its concern to the weakening labour market.
Revisions in the past two jobs reports, as well as a significant downwards revision in the Labour Department's annual report covering the year before March 2025, are compounding concerns that the US economy is becoming distressed.
“The scary part about cooling demand is once that has momentum, then it could take on a life of its own,” said Derek Tang, an economist at LHMeyer / Monetary Policy Analytics.
But not every member may be on board. Several of the more hawkish members on the FOMC remain adamant that more aggressive rate cuts are the best way of juicing the economy.
Still, economic indicators are generally positive after GDP growth, strong performances in the stock market and a generally low unemployment rate. But fears are brewing that the economy may be feebler than believed.
“I think the economy is weakening,” JPMorgan chief executive Jamie Dimon told CNBC last week. Whether the US is “on the way to recession or just weakening, I don’t know”.
