With the U.S. Federal Reserve widely expected Wednesday to reduce its key interest rate by a quarter-point to about 4.1%, economists and Wall Street investors will be watching for signals about next steps: How deeply might the Fed cut in the coming months?
There are typically two approaches the central bank takes to lowering borrowing costs: either a measured pace that reflects a modest adjustment to its key rate, or a much more rapid series of cuts as the economy deteriorates in an often-doomed effort to stave off recession.
For now, most economists expect the first approach — what many analysts call a “recalibration” of rates to keep the economy growing and businesses hiring. Under this view, the Fed would reduce rates as many as five times by the middle of next year, bringing its benchmark closer to a level that neither stimulates nor slows the economy.
Wall Street traders expect three reductions this year and two more by next June, according to futures pricing tracked by CME FedWatch.
A rate cut Wednesday would be the first in nine months. The Fed, led by Chair Jerome Powell, reduced borrowing costs three times last year but then paused to assess the impact of President Donald Trump’s sweeping tariffs.
As recently as late July, Powell described the job market as “solid” and kept rates unchanged while officials took more time to gauge the economy.
Since then, however, the government has reported a sharp slowdown in hiring, and previous data has been revised much lower. Employers cut 13,000 jobs in June and added just 22,000 in August.
Last week, the government also said its estimate of job gains for the year ended in March 2025 would likely be revised down by 911,000, a sharp reduction in total employment. Powell and other Fed officials had previously pointed to a robust job market as a key reason for holding rates steady. With businesses pulling back on hiring, the economic case for a cut — which can spur borrowing and spending — has grown stronger.
The downward revision of nearly a million jobs is a “huge downgrade,” said Talley Leger, chief market strategist at the Wealth Consulting Group. “If that doesn’t light a fire under the Fed just from an economic perspective I don’t know what will.”
Still, inflation remains stubbornly elevated, partly because tariffs have lifted the cost of goods such as furniture, appliances and food. Prices rose 2.9% in August from a year earlier, up from 2.7% in July.
Persistent inflation could keep the Fed from cutting too quickly. The central bank will release its quarterly economic projections after Wednesday’s meeting, and many economists expect they will show three total reductions this year and at least two more next year.
Five cuts would bring the Fed’s key rate down to just above 3%. Many economists think that is roughly the level that would neither stimulate nor slow the economy.
If Fed officials begin to worry the economy is slipping into recession, they would likely cut more aggressively. But for now, most economists don’t see rapid reductions as necessary.
“We’re not at a break-glass moment,” said Vincent Reinhart, chief economist at BNY Investments. “This is a recalibration.”