Fed may opt for 25-basis-point cut instead of 50 amid inflationary pressures

ISTANBUL

The Fed’s likelihood to cut rates by 50 basis points is fading as inflationary pressures come to the fore and some analysts say a 25-basis-point cut may be on the horizon instead.

The Fed is set to make its next monetary policy decision this week, with markets closely watching Fed Chair Jerome Powell’s remarks for clues on future policy direction.

According to money market estimates, the Fed is widely anticipated to deliver a 25-basis-point cut at its upcoming meeting. Markets also expect three total rate cuts this year, with at least three more likely in 2026.

The question on analysts’ minds is whether a 50-basis-point move could still be on the table this month.

Chief Global Economist at Capital Economics Jennifer McKeown told Anadolu that the upside inflation risks mean that “speculation about a 50 bp cut looks overdone,” adding that new estimates may show a higher interest rate trajectory than markets currently expect.

“Easing labor market conditions mean the FOMC (Federal Open Monetary Committee) is set to vote for a 25 bp cut,” McKeown said.

“While Powell's reference to shifting risks was also about the lack of any meaningful impact of tariffs on consumer prices so far, another reason to doubt that the FOMC will vote for a 50 bp is that those risks have not disappeared,” she added.

McKeown stated the cooling labor market shows that the Fed “can afford to look through even a renewed rebound in services inflation.”

“Whereas stronger activity growth would raise the risk of sustained above-target inflation,” she said. “Until we gain more clarity, we doubt many of the FOMC participants will make big changes to their interest rate projections.”

Echoing that view to Anadolu, James Knightley, chief international US economist at ING Group, predicts inflationary fears will gradually subside, making room for up to 75 basis points in rate cuts this year.

“However, the sense of caution amongst the majority of members regarding the tariff impact on inflation means that 25bp is the most likely outcome and that is what the market is anticipating too,” he said, noting that the evidence of declining consumer demand and the weakening labor market is becoming increasingly obvious.

“Inflation remains above target and tariffs are likely to keep it elevated in the near term, but the balance of risks are tilted towards the need for more support for the economy,” he added.

Christian Lawrence, head of cross-asset strategy at Rabobank, told Anadolu that a 25-basis-point cut is expected at the Fed’s September meeting.

“Inflationary pressures are picking up again, as seen in the CPI (consumer price index) inflation report,” he said. “While the passthrough of price inflation due to the tariffs themselves has been difficult to measure, there is no question that CPI inflation is still too high.”

He added that fears that the worst is still to come are high due to lagging labor data, while a significant slowdown in consumption still looms.