There may be a rate cut by the Fed, but at what cost

The Federal Reserve is widely expected to cut its key interest rate next week to give a boost to the faltering labor market, despite concerns that lower borrowing costs could lead to higher inflation.

As of Friday, financial markets were anticipating an 87% chance that the central bank would cut its key interest rate by a quarter of a percentage point to a range of 3.5% to 3.75%, according to CME Group’s FedWatch tool, which forecasts interest rate movements based on federal funds futures trading data. This will be the third rate cut in as many meetings.

The central bank’s 12-member policy committee was sharply divided over whether interest rates should be lowered to encourage spending and stabilize a struggling labor market, or kept high for longer to fight inflation that remains well above the Fed’s target of a 2% annual rate.

Recent labor market data showed a slowdown in hiring, giving the upper hand to those calling for lower interest rates. The Fed has a dual mandate from Congress to maintain price stability while preventing unemployment from rising excessively.

The Fed uses monetary policy to pursue its dual mission: The federal funds rate affects borrowing costs on short-term loans such as credit cards, auto loans, and all other types of credit. Therefore, the Fed can either encourage or discourage spending and saving depending on where it sets interest rates.

Economic policies implemented by President Donald Trump’s administration have put pressure on both sides of the dual mandate, creating a dilemma for the Fed about which should prioritize. Tariffs have pushed up consumer prices, exacerbating concerns about inflation, while also raising uncertainty among business leaders, discouraging expansion and hiring. His campaign against immigration also contributed to low employment rates.

In public speeches last month, Fed officials generally split into two camps: one that believed inflation was the bigger risk, and another that was more confident that tariffs represented a one-time price hike rather than a source of inflation, which, by definition, means a sustainable increase in prices.

Fed officials have been silent on monetary policy since last week due to the Fed’s usual blackout on communications before the meeting. However, before that, the balance seemed to be tilting in favor of lower interest rates.

A delayed inflation report on Friday showed that some consumer prices rose less than expected in September, raising the odds of a rate cut.