Fed faces dilemma over 25 or 50 bps cut in Sept, WSJ’s Timiraos says

Investing.com-- The Federal Reserve faces a dilemma over cutting interest rates when it meets next week, the Wall Street Journal’s Nick Timiraos said, as the decision comes amid a cooling labor market and recent signs of sticky inflation. 

The central bank is set to meet next week, with markets split between a 25 or 50 basis point cut. Some sticky inflation data released this week favored the prospect of a smaller, 25 bps cut, CME Fedwatch shows.

But Timiraos said recent data provided mixed signals on the U.S. economy, and that the Fed’s outlook on the economy, provided at its meeting next week, could further complicate matters.

Timiraos earned the moniker of “the Fed whisperer” from some publications and market participants after accurately predicting each of the Fed’s interest rate decisions since 2022, where the central bank raised rates to a two-decade high and kept them there for 14 months.

Media reports suggested that the Fed had even leaked its planned decisions to Timiraos, who is the WSJ’s chief economics correspondent and leads the publication’s coverage of the Fed and U.S. economic policy. 

Timiraos said the Fed was “nervous” about keeping interest rates high for too long, amid mounting evidence that higher rates were cooling the economy as intended. The central bank was still vying for a soft landing, where inflation falls while the labor market remains resilient. 

He said that the quarterly economic projections released next week were likely to provide more cues on how many rate cuts officials expect this year, with two more meetings left after September. 

Markets expect the Fed to cut rates by over 100 bps this year, with any indications of a smaller reduction likely to increase the risk of a “market pullback,” Timiraos said.

He noted that the central bank preferred to usually move rates by a margin of 25 bps. 

Despite uncertainty over the breadth of the cut, the Fed is still widely expected to begin cutting interest rates when it meets next week, following signals indicating as much from Chair Jerome Powell and several other officials.