Is a half-point Fed interest rate cut on the table?

Key takeaways

Bond futures traders see a 94% chance of a quarter-point cut and a 6% chance of a larger half-point cut on Wednesday in the US.
With recent data showing a weakening labor market, analysts expect central bankers to ease policy to support the economy, even as some upside risks to inflation from tariffs remain.
Dissenting votes are possible, with some Fed officials favoring a more aggressive path.

The question is not whether the Federal Reserve will cut interest rates at its Wednesday policy-setting meeting, but by how much.

On Monday, President Donald Trump called for the Fed to enact a “bigger” cut. Markets widely expect central bankers to reduce the benchmark interest rate by a more measured 25 basis points. Proponents of a more aggressive 50-point cut cite the rapidly weakening labor market and minimal upside risks to inflation from tariffs.

Wednesday’s policy decision will be subject to heightened scrutiny amid increasingly harsh criticism of the Fed by Trump, who has pushed for dramatically lower interest rates for months. Simmering in the background are worries about the erosion of the Fed’s independence, with legal proceedings surrounding Trump’s attempt to fire Fed Governor Lisa Cook still ongoing.

Samuel Tombs, chief US economist at Pantheon Macroeconomics, expects a high degree of division among Fed officials. “The most likely outcome is a three-way split,” he wrote in a note to clients on Monday, with some governors “attempting to please Mr. Trump with a vote to ease by 50 bp” while the majority opt for a smaller cut and one or two vote for no change.

Wednesday’s meeting will also be accompanied by a new “dot plot”—Fed officials’ collected projections for rates and the economy in the years ahead—which was last updated in June. With the labor market weakening, September’s dots may indicate whether officials expect deeper cuts before the end of the year beyond a half-point, which had been the consensus in June.

September rate cut ‘all but guaranteed’

The target federal-funds rate sits at a range of 4.25%-4.50%, where it has been since December. It’s been almost exactly a year since the Fed’s last jumbo 50-basis-point cut, which came in September 2024 after data showed improvement in the inflation picture and evidence of some softening in the labor market.

But now, “the rapidly weakening employment picture and other less-than-stellar economic data all but guarantees a September rate cut,” explains Dominic Pappalardo, chief multi-asset strategist at Morningstar Wealth. On Monday, bond futures markets were pricing in roughly 94% odds of a smaller cut, according to the CME FedWatch Tool, and 6% odds of a larger cut. Expectations for that larger cut were as high as 11% earlier this month.

The case for a big rate cut

Much of the argument for a larger cut is based on the cooling labor market. Sluggish monthly payroll growth data for July and August took analysts by surprise, and a slew of downward revisions to previous months’ data means the jobs picture looks much worse than it previously appeared. On top of that, annual benchmark revisions to payroll data between March 2024 and March 2025 showed that the economy added 900,000 fewer jobs than previously estimated over that year.

Steve Englander, head of global G10 FX Research at Standard Chartered, says the factors that led to the dramatic overstatement of jobs growth over the past year are still in place. “There’s no reason to believe that recent numbers are not similarly biased,” he says, and Fed officials are aware of the distortions. He wrote in a note to clients last week that the combination of soft data and those downward revisions could “justify a significant move” from the Fed.

The case for going small on rate cuts

Jim Caron, chief investment officer of the portfolio solutions group at Morgan Stanley Investment Management, believes the Fed will opt for a smaller cut. “They can be steady as opposed to rushed,” he says.

“We don’t see the Committee going for something more aggressive,” JPMorgan chief US economist Michael Feroli wrote Friday. He argues that the labor market has been cooling at a “much more gradual pace” than last summer, before the Fed made its last big cut. He points to how the unemployment rate has remained relatively steady these past few months, while inflation has moved higher—not lower, like it did last summer.

Analysts say the ongoing upward pressure on prices from tariffs will steer the Fed toward a more cautious approach. “Twelve months ago, you didn’t have the threat of inflation coming from tariffs,” says Ryan Sweet, chief US economist at Oxford Economics.

“The committee is still quite worried about the possibility that tariffs could lead to some medium-term problems with inflation,” adds Tombs of Pantheon Macroeconomics.

Another factor is the so-called neutral rate—the interest rate at which policy is neither accommodative nor restrictive. Central bankers have acknowledged that while rates have remained steady, the neutral rate is likely higher than it has been in the past. It’s estimated to be somewhere around 3.0%-3.5%. On top of that, loosening financial conditions mean policy overall is less restrictive. “A year ago, when [the Fed] went for that jumbo 50 basis point cut, they thought rates were much further above neutral, so they had further to go,” Tombs adds.

For Englander of Standard Chartered, rates are still high enough above neutral to justify a larger cut. “Why not get closer to equilibrium and then see what happens?” he asks.

What to expect from the Fed meeting

Even when financial markets and analysts agree, no one has a crystal ball for the Fed. Rate cut predictions have whipsawed this year amid a rapidly changing economic outlook.

At the same time, central bankers looking at the same economic data may not reach a consensus as to the next best move for policy. Earlier this summer, disagreement over the nature of tariff-induced inflation—whether price pressures would be temporary or more pervasive—led to two dissenting votes among the governors at the Fed’s July meeting for the first time since 1993. Wednesday’s meeting could bring more of the same.

“We do expect some dissents for a 50bp cut, and perhaps for something even larger,” writes Feroli of JPMorgan.