Federal Reserve Runs Risk of Loosening Before Inflation Is Contained
By Dennis Shen, Updated September 17, 2025, 16:43 GMT+00:00
The Federal Reserve gets set to announce new interest rates. Many experts fear the bank may ease rules too soon while inflation still runs high.
Current Economic Context
Headline inflation in the United States stands at 2.9%. The economy grows at about 2%. Some signs show a small dip in the labor market, yet the overall scene stays strong. Uncertainties from higher tariffs make the outlook less clear. Most expect the Fed to cut rates by 25 basis points in its next meeting.
Market Expectations and Political Pressures
Financial markets mostly assume a rate cut is on the way. Some investors even guess a 50bps cut will come. This view comes from market mood and political push. The U.S. administration asks the Fed to ease fast to boost growth. Cutting rules too early might let inflation come back strong.
Risks of Premature Easing
Cutting rates before inflation is well checked brings back memories of last September. Then, a 50bps cut was made under market and political weight after short-lived labor worries. Today, lower immigration means the job market may need fewer workers to stay balanced. This factor could lower the need for large cuts.
Chairman Powell might point to signs of stress in the job market. Weak payroll numbers in August, small rises in the unemployment rate, and more claims for jobless benefits add to this view. A drop in producer prices and a slow rise in core price levels may further back the case for a cut.
Gauging the Magnitude of Rate Cuts
Some discuss a 50bps cut, but even many FOMC members are not set on a 25bps move. Capital markets now show a taste for small steps. A large cut might seem like a sign that the Fed waited too long, a view that fuels critics who say Powell acted “too late.”
The key issue goes beyond September. Whether the Fed makes more cuts later depends on new economic data, price trends, and shifts in market and political views. Powell is expected to show he welcomes more cuts while warning that inflation stays above the target. In the services sector, inflation now holds at 3.8%.
Inflation Outlook and Economic Challenges
Inflation may come down next year, but several risks remain. Higher tariffs, a strong economy, and loose fiscal plans add pressure. Core inflation stays high at 3.1% year-over-year, marking a multi-month peak. These factors make more rate cuts a clouded option.
Political Influences on Fed Independence
Market watchers see rising political pressure on the Fed. President Donald Trump has asked for a swift 300bps reduction in rates. A Trump supporter, Stephen Miran, now helps guide the Fed board. Moves to remove key governors make some worry about the bank’s freedom.
This political push might steer monetary policy toward a softer side. A softer policy could hurt long-run price and money stability. It might also weaken the U.S. dollar, a change that could speed up the switch away from the dollar.
Conclusion
The Federal Reserve stands at a clear fork: acting fast risks a return of high inflation, while waiting might slow growth amid job market worries. Stakeholders will watch closely for the Fed’s hints in the coming days and months as it tries to keep the balance between growth support and price control.
About the Author:
Dennis Shen, CFA, is the Chair of the Macroeconomic Council and Lead Global Economist at Scope Ratings, Berlin, Germany.
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