Why the US is expected to cut interest rates

It's finally happening.

After months of economic debate and mounting attacks from US President Donald Trump, the US central bank is poised to cut interest rates on Wednesday.

The Federal Reserve is widely expected to announce it is lowering the target for its key lending rate by 0.25 percentage points. That will put it in a range of 4% to 4.25% - the lowest level since late 2022.

The move - the bank's first rate cut since last December - is expected to kick off a series of additional reductions in the months ahead, which should help bring down borrowing costs across the US.

But they carry a warning about the economy, reflecting increased consensus at the Fed that a stalling job market needs a boost in the form of lower interest rates.

Nor are they likely to satisfy the president, who has called for far deeper cuts.

In many ways, it is no surprise that the Fed, which sets interest rate policy independent of the White House, is cutting.

The inflation that ripped through the post-pandemic economy and prompted the bank to raise interest rates in 2022 has come down significantly.

In the UK, Europe, Canada and elsewhere, central banks have already responded with lower rates, while the Fed's own policymakers have said for months that they expected to lower borrowing costs by at least half a percentage point this year.

At the Fed's last meeting, two members of the board even backed a cut.

They were outvoted, as other members remained worried that Trump's economic policies, including tax cuts, tariffs and mass detentions of migrant workers, might cause inflation to flare back up again.

And it's true that the US in recent months has seen inflation tick higher. Prices rose 2.9% over the 12 months to August, the fastest pace since January, and still above the Fed's 2% target.

But in recent weeks, those concerns have been eclipsed by weakness in the labour market. The US reported meagre job gains in August and July and an outright loss in June - the first such decline since 2020.

"It really comes down to what we've seen in the jobs market - the deterioration that we've seen over the past few months," said Sarah House, senior economist at Wells Fargo, which is expecting rates to drop by 0.75 percentage points by the end of the year.

"The Fed knows that when the labour market turns, it turns very quickly, so they're wanting to make sure they're not stepping on the brakes of the economy at the same time the labour market has already slowed."

Though Trump has rejected concerns about economic weakness, the rate cut should not be unwelcome to him - he has spent months blasting the Fed's hesitance to cut rates, which he says should be as low as 1%.

On social media, he has called Federal Reserve chairman Jerome Powell "a real dummy", accusing him of holding back the economy by leaving interest rates too high for too long.

"Too Late" MUST CUT INTEREST RATES, NOW, AND BIGGER THAN HE HAD IN MIND. HOUSING WILL SOAR!!!" Trump wrote in a social media post this week, referring to Powell.

Trump's pressure is not just rhetorical. He moved quickly to install the chairman of his Council of Economic Advisers, Stephen Miran, on the Fed in time for this week's meeting after a short-term vacancy opened up last month.

His administration has also threatened Powell with firing and investigation and is locked in a legal battle over its effort to fire economist Lisa Cook, another member of the board.

To critics, Trump's moves amount to an assault on the Fed's independence that is unprecedented in recent history.

But whatever awkwardness in the air at this week's Fed meeting, analysts say they believe the Fed's decision to cut would have come regardless of his campaign.

"The president's policies are certainly causing the economic activity that is forcing the hand of the Fed," said Art Hogan, chief market strategist at B. Riley Wealth.

"The president's jawboning of the Fed to lower rates I think has had zero impact whatsoever."