The Federal Reserve is meeting on Tuesday and Wednesday to determine the appropriate monetary policy that can both address both inflation risks alongside the increasingly disconcerting state of the U.S. labor market.
Forecasts are already banking on a 25-basis-point cut from the current target range of 4.25 to 4.50 percent. Financial markets have placed the odds of this at 96 percent, according to the CME FedWatch Tool, with a four percent chance of a larger, 50-point cut.
Why Might the Fed Cut Rates?
The near certainty of a rate cut comes after months of debate over how the Fed can best balance inflation and employment—the core elements of its dual mandate—alongside a sustained campaign of pressure from President Donald Trump on both the central bank and its Chairman Jerome Powell.
Inflation is sitting above the long-term, two-percent target, a fact that till recently made the Fed’s “wait-and-see” stance seem prudent as the impacts of Trump’s trade policies on consumer prices became more clear.
However, while inflation shows no signs of cooling—the 12-month rate having risen to 2.9 percent in August from 2.7 percent in July—a deterioration in the labor market outlook appears to have supplanted price concerns and fueled current expectations of an imminent cut.
Data on job growth continues to fall short of forecasts, and downward revisions to past figures from the Department of Labor have reinforced the view that the Fed may need to stimulate consumer spending, lower borrowing costs and encourage investment to prevent a labor market crisis.
What Will A Fed Rate Cut Mean For Americans?Borrowing Costs and Mortgage Rates
The Fed does not directly control most interest rates, but its Federal Open Market Committee (FOMC) sets the federal funds rate that banks charge each other for overnight lending.
Changes to this benchmark are typically passed onto consumers and businesses, meaning that when the Fed “cuts rates,” borrowing costs across the board are likely to follow. This would result in lower interest payments on car loans, student loans and credit cards, though the effects are indirect and gradual. However, interest rates on existing fixed-rate loans will remain unchanged regardless of the Fed’s decision.
Federal Reserve Chairman Jerome Powell talks to reporters following the regular Federal Open Market Committee meetings at the Fed on July 30, 2025 in Washington, DC.
Federal Reserve Chairman Jerome Powell talks to reporters following the regular Federal Open Market Committee meetings at the Fed on July 30, 2025 in Washington, DC.
Chip Somodevilla/Getty Images
Mortgage rates have already begun to ease, a sign to some that banks and other lenders are already moving in anticipation of a cut at this week’s meeting. Danielle Hale, chief economist at Realtor.com, told Newsweek that September’s cuts and those which may follow “have already been priced into the market,” meaning mortgage rates are unlikely to drop much further in the near term.
“Mortgage rates have already tilted lower in anticipation of several rounds of rate cuts by the Fed,” Lawrence Yun, chief economist at the National Association of Realtors, told Newsweek. “Homebuyers will be the winners as more households will begin to qualify to buy a home.”
Savings
While a cut signals good news for borrowers, it can also make saving a less rewarding endeavor, as banks often lower the interest paid on savings accounts, Certificates of Deposit (CDs) and money market accounts in response.
“Savers tend to lose out when rates are cut,” Diane Swonk, chief economist at KPMG US, told Newsweek. “This is especially important as inflation is still moving higher. Those who rely more on interest income will feel further crimped.”
“On the savings side, yields on products like high-yield savings accounts and CDs may be among the first to decline after a rate cut,” Bankrate Financial Analyst Stephen Kates told Newsweek. “While a single cut will have a relatively modest impact, savers should be aware that multiple cuts over the coming year could significantly reduce the inflation-adjusted return on these products, making them less attractive over time.”
However, Mark Blyth, a professor of international economics at Brown University, told Newsweek that most Americans are unlikely to feel these effects.
“For normal people, it means next to nothing,” he said. “For large borrowers or Wall Street players, it’s meaningful.”
Investments
Lower borrowing costs and cheaper opportunities for investment mean that rate cuts typically generate strong bullish sentiment in the market. For investors, falling rates often pull money out of low-yield bonds and into equities, boosting stock markets and benefiting the investments of those with exposure through retirement accounts such as 401ks and IRAs.
“Lower interest rates lower the opportunity cost of alternatives and can make investments like stocks, and real estate look more attractive,” Hale told Newsweek.
“It will juice [investments] a little,” said Blyth, “after all, it’s a bit like getting free money and that usually goes straight into stocks.”
Inflation
Lowering rates to encourage spending and investment may put some wind in the sails of the U.S. economy for the short term, but many worry that a cut—especially a sizeable one—carries with it increased inflationary risks.
Price increases as a result of President Trump’s tariffs are already on the Fed’s radar. During a recent speech, Chairman Powell said that these effects were “now clearly visible,” and are expected to keep building over the coming months.
However, Powell acknowledged that monetary policy is currently “restrictive,” meaning the Fed may have some room to maneuver without triggering a surge in inflation.
“A 25 basis-point-cut is small enough that it will still leave this rate in restrictive territory, but somewhat less so,” Hale told Newsweek. “Further, with signs pointing to cooling in the labor market, consumer and investment demand may not be as robust as they have been, so we may not see much impact on consumer prices.”
When Will the Fed Make Its Announcement?
The FOMC is currently in the middle of its two-day meeting, with a final decision expected on Wednesday at 2 p.m. ET. Shortly after, Powell will hold a press conference to discuss the central bank’s rationale and share its outlook for the U.S. economy.
“Jerome Powell will choose his words carefully on Wednesday,” Kates told Newsweek. “The committee is walking a fine line between supporting the labor market and containing inflation.”
“This is not a rate cut that signals victory over inflation,” he added. “Unfortunately, it is a concession to a weakening job market.”
Correction 09/16/25 13:18 p.m. ET: This article was updated to remove a quote from Michele Raneri, vice president and head of U.S. research and consulting at TransUnion, containing a projection that was subsequently retracted.