Fed Signals Modest Rate Cut Amid Inflation Jitters

(MENAFN) Hopes for a deeper 50-basis-point interest rate cut by the Federal Reserve are dimming fast, as persistent inflationary pressures shift the central bank’s likely course toward a more modest 25-basis-point reduction at its upcoming policy meeting.

With the decision expected this week, all eyes are on Fed Chair Jerome Powell, whose comments could offer critical insight into the path of monetary policy for the remainder of the year.

Money markets are currently pricing in a 25-basis-point cut, and expectations now lean toward a total of three reductions in 2025, with additional easing anticipated into 2026.

Still, speculation lingers over whether a sharper 50-point move remains possible. Analysts suggest that's increasingly unlikely.

“Speculation about a 50 bp cut looks overdone,” Jennifer McKeown, Chief Global Economist at Capital Economics, told media, citing ongoing inflation risks. She added that updated economic projections could reveal a more aggressive interest rate trajectory than markets have priced in.

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

She emphasized that despite Powell’s recent remarks about the limited inflationary impact of tariffs, policymakers remain cautious. “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 said.

According to McKeown, the cooling labor market offers the Fed room to maneuver. “The Fed can afford to look through even a renewed rebound in services inflation,” she said. “Whereas stronger activity growth would raise the risk of sustained above-target inflation. Until we gain more clarity, we doubt many of the FOMC participants will make big changes to their interest rate projections.”

James Knightley, Chief International US Economist at ING Group, echoed the sentiment, telling media that he expects inflation concerns to ease gradually, opening the door to as much as 75 basis points of rate cuts in total 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,” Knightley said, noting clear signs of softening consumer demand and a weakening labor market.

As Fed officials weigh their next move, markets remain on edge—watching for any shift in tone that could reshape expectations for the trajectory of U.S. interest rates.

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