The Federal Reserve is facing a complex and pressing situation as it prepares for its upcoming meeting regarding interest rates. Recent economic indicators have raised concerns about a potential recession in the U.S., a sentiment echoed by Mark Zandi, chief economist at Moody’s Analytics. During a Thursday interview with CNBC, Zandi pointed out that disappointing job figures might already signal an economic downturn. He emphasized the Fed’s desire to prevent such an outcome, noting that their reputation and independence could be significantly jeopardized if they were blamed for a recession.
Zandi’s comments follow warnings from Wharton finance professor Jeremy Siegel, who suggested this past July that Fed Chairman Jerome Powell may need to consider resigning to protect the Federal Reserve’s long-term independence. Siegel’s reasoning hinges on the risk that, in a faltering economy, President Trump could use Powell as a scapegoat, pushing Congress to give the executive branch more control over the central bank. He highlighted that the Fed’s establishment is not enshrined in the Constitution, indicating its powers are derived from Congress and are amendable.
Further complicating the Fed’s position, Stephen Miran has been appointed to join the central bank while continuing as chair of the White House’s Council of Economic Advisers. Miran has previously advocated for alterations that could diminish Fed independence, which has raised concerns about the administration’s intentions regarding U.S. monetary policy. JPMorgan analysts have characterized Miran’s appointment as a potential threat to the integrity of the Federal Reserve Act, suggesting it could lead to significant changes in monetary and regulatory authority.
While Trump has exerted pressure on the Fed to implement rate cuts, the central bankers have generally resisted such demands. However, the latest downturn in the job market has resulted in a strong likelihood of a rate reduction. The Fed’s upcoming meeting scheduled for Tuesday and Wednesday serves as a critical juncture, with market analysts currently debating whether the reduction will be by 25 or 50 basis points from the existing range of 4.25%-4.5%.
JPMorgan’s chief U.S. economist, Michael Feroli, anticipates potential dissent among Fed governors regarding the extent of the cut. He noted that at the last meeting, governors Christopher Waller and Michelle Bowman dissented from their peers, advocating for a quarter-point cut. This time, they may push for a larger reduction, especially with Miran likely to agree with a call for more aggressive cuts.
Zandi indicated that while a half-point cut is not guaranteed, it remains a possibility if economic conditions continue to weaken. He suggested that the Fed’s optimal target for the fed funds rate might be lower than previously projected, estimating a range of 2.5% to 3% by the end of 2026 under certain adverse economic scenarios. This forecast reflects a growing concern regarding the balance between monetary policy and the necessity for maintaining the Federal Reserve’s independence in turbulent times.
