By Indradip Ghosh
BENGALURU (Reuters) -The Federal Reserve will cut its key interest rate by 25 basis points on September 17 as labor market softness overshadows inflation risks, said almost all 107 economists in a Reuters poll, with most expecting one further cut next quarter.
Stalling job growth in August and a sharp downward revision to 12-month job data through March led many economists to revise their forecasts to include more rate cuts than they had thought previously.
Markets have fully priced in a September cut and now anticipate three reductions this year, compared to two just weeks ago. Fed Chair Jerome Powell and other policymakers have hinted at easing monetary policy despite inflation risks related to tariffs.
The Fed will lower the interest rate by a quarter point to 4.00%-4.25% next week for the first time this year, 105 of 107 economists in the September 8-11 Reuters poll predicted. Last month, a 61% majority had expected that to happen.
“The Fed now has four months of evidence of a slowdown in labor demand that appears more persistent in nature … In short, ignore where inflation is today and ease policy to support the labor market,” said Michael Gapen, chief U.S. economist at Morgan Stanley.
“We think a 25bp rate cut in September is more likely than a larger cut.”
Two of the analysts expected a 50-basis-point reduction.
President Donald Trump has repeatedly criticized Powell for his reluctance to cut rates.
Trump’s nominee for a Fed governor, Stephen Miran, may not join the board in time for next week’s meeting, while Governor Lisa Cook continues in her job following a court ruling after the president attempted to remove her.
Some board members could dissent next week and vote for a bigger cut or a hold, many economists said. Governors Christopher Waller and Michelle Bowman opposed holding rates steady in July.
“It’s just a very difficult policymaking environment. I wouldn’t be surprised to see more dissents,” said Stephen Juneau, a U.S. economist at Bank of America.
“If the Fed cuts aggressively to where they’re just leaning too much on the story – the labor market has significant downside risk and they don’t have to worry about inflation upside risk – then we get in the situation where it’s more of a policy error.”
A 60% majority of respondents, 64 of 107, expected the rate to go down by 50 basis points by end-2025, but 37% predicted 75 bps cuts by year-end, a sharp rise from only 22% in August.
More than 60% of the economists, 26 of 42, who answered an extra question said surging inflation or a combination of that with fast-rising unemployment was more likely over the coming year.
Inflation is expected to remain above the Fed’s 2% target until at least 2027, while unemployment is expected to hover around the current 4.3% for years, the poll found.
Later on Thursday, official data is expected to show consumer price inflation accelerated last month.
Still, poll medians suggest the central bank will cut rates by another 75 basis points next year to put the fed funds rate at 3.00%-3.25%.
“If we get a more dovish Fed chair, which presumably we will, we do think the Fed will cut rates at that point, in the second half of next year by an additional 75 basis points,” Bank of America’s Juneau added.
“How willing are you to cut rates and to what level are you willing to cut rates? That’s going to be a key interview question for the next Fed chair.”
About 76% of the economists said they did not foresee a significant erosion of the Fed’s independence during Powell’s term, which ends in May.
(Other stories from the Reuters global economic poll)
(Reporting by Indradip Ghosh;Polling By Renusri K and Anant Chandak;Editing by Helen Popper)
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