A Fed Rate Cut May Be Coming—But At What Cost

The Federal Reserve is widely expected to cut its key interest rate next week to give a boost to the faltering job market, despite concerns that lower borrowing costs could stoke inflation.

As of Friday, financial markets were pricing in an 87% chance the central bank would cut its key interest rate by a quarter-point to a range of 3.5% to 3.75%, according to the CME Group’s FedWatch tool, which forecasts rate movements based on fed funds futures trading data. It would be the third rate cut in as many meetings.

The 12 members of the central bank’s policy committee have been sharply divided over whether to cut rates to encourage spending and stabilize the faltering job market, or to keep them higher for longer to fight inflation that is still well above the Fed’s target of a 2% annual rate.

Recent data on the labor market has shown a hiring slowdown, giving the upper hand to those advocating for rate cuts. The Fed has a dual mandate from Congress to maintain price stability while preventing unemployment from rising excessively.

The Fed uses monetary policy to pursue its dual mandate: The federal funds rate influences borrowing costs on short-term loans such as credit cards and car loans and all kinds of other credit. So, the Fed can either encourage or discourage spending and saving depending on where it sets rates.

Economic policies implemented by the administration of President Donald Trump have put pressure on both sides of the dual mandate, creating a dilemma for the Fed about which to prioritize. Tariffs have pushed up consumer prices, fueling concerns about inflation, while also stoking uncertainty among business leaders, discouraging expansion and hiring. His immigration crackdown has also contributed to a reduction in hiring.

In public speeches last month, Fed officials generally fell into two camps: one that thought inflation was the greater risk, and another that was more confident tariffs represented a one-time price hike rather than a source of inflation, which, by definition, is a sustained increase in prices.

Fed officials have kept silent on monetary policy since last week due to the Fed’s customary pre-meeting communication blackout. However, before that, the balance seemed to tilt in favor of cutting rates.

A belated inflation report Friday showed some consumer prices rose less than expected in September, further improving the odds of a rate cut.