The Fed looks set to cut rates this week. What comes next is unclear as stagflation fears rise.

Almost one year ago, the U.S. economy looked like it was teetering on the edge of a recession. Hiring was faltering, unemployment was rising and annual revisions to employment tallies showed that the job market was in worse condition than previously estimated. Realizing the economy wasn’t as strong as they had believed when they last met, the Federal Reserve in September cut interest rates for the first time since the pandemic.

Today, the U.S. central bank finds itself in a similar predicament. A recent string of weak jobs reports may convince policymakers to resume cutting rates when the Federal Open Market Committee (FOMC) wraps up its two-day meeting on Sept. 17.

But this time, a new challenge looms: Inflation is on the rise again, drifting further away from the Fed’s 2 percent target. Some Fed officials fear that cutting rates too soon as tariffs continue pushing prices higher could repeat the central bank’s mistakes of the 1970s. That delicate combination of rising prices and weakening employment, often referred to as stagflation, could leave the Fed with fewer tools — and less conviction — to cushion the economy’s slowdown.

The Fed will cut rates in September, but how big will it be?

A sharp slowdown in hiring this summer has made a September rate cut appear all but certain. Investors see a near 90 percent chance that the Fed cuts this month, according to CME Group’s FedWatch tool.

The once-revered U.S. labor market doesn’t look so strong anymore. Employers added just 22,000 jobs in August, and in June, the economy lost jobs for the first time since 2020, according to the latest report from the Bureau of Labor Statistics.

Without gains in health care, job growth would have turned negative for three of the past four months, BLS data shows. Job cuts, meanwhile, are now spreading beyond the government and professional services industries and into construction and manufacturing.

Fed Chair Jerome Powell didn’t dissuade investors, saying in an August keynote that those shifting labor market dynamics “may warrant adjusting our policy stance.”

But he also admitted the Fed’s two goals — stable prices and full employment — are now “in tension” with each other. Analysts say that makes the Fed most likely to cut borrowing costs by a quarter of a percentage point, though some say they could see a case for a bigger cut.

Last year, the Fed decided to cut interest rates by half a percentage point when it faced similar downside risks. Inflation, however, was at a pandemic-era low of 2.4 percent.

“There is growing evidence that labor market softness is weighing on consumers’ willingness to spend and that businesses are hesitant to invest,” says Gregory Daco, chief economist at EY. “I don’t really see much reason to delay larger moves in monetary policy when the Fed is behind the curve.”

Fed Governor Christopher Waller, who dissented against the Fed’s decision to leave interest rates alone at its last meeting in July, believes that the slowdown in the labor market could not only suffocate inflation — but derail the entire economy. Powell himself appeared like he was coming around to that view in his pivotal Jackson Hole address last month.

It is possible “that the upward pressure on prices from tariffs could spur a more lasting inflation dynamic,” he said. “Given that the labor market is not particularly tight and faces increasing downside risks, that outcome does not seem likely.”

But other more inflation-minded members of the committee aren’t ready to conclude that a slowdown in the labor market will be enough to extinguish tariff-driven inflation. 

Patrick Harker, former president of the Philadelphia Fed, would be one of those officials if he were still on the committee, the official said in an interview with Bankrate. He still hears from business contacts that they’re holding off on raising prices — for now — but they can’t stay put forever.

How far, and how fast, will the Fed move to keep cutting after the September meeting?

When Harker retired in June, the policymaker said he had two rate cuts penciled in for 2025. That’s even while penciling in one of the highest forecasts for the unemployment rate among the FOMC: 4.5 percent. 

“I still think that’s appropriate,” he said. “Despite all the turmoil, [the economy] pretty much rolled out the way I thought it would.” 

Investors expect officials to also debate at their September meeting whether to continue cutting interest rates at their next two meetings in October and December. Last year’s September cut was the first in a series of three, with policymakers reducing borrowing costs a total of one percentage point.

Whether officials want to stick with that past playbook — or strike a more cautious approach — depends on how much they think borrowing costs are currently stomping on economic growth, Harker said. 

The concept is often referred to as the “neutral” rate of interest, a level where interest rates are neither speeding up nor slowing down the financial system. If interest rates are still putting meaningful pressure on growth, the case for cutting further strengthens. If they’re closer to neutral, officials may feel more comfortable taking their time.

Almost all policymakers believe that interest rates are either “moderately” or “modestly” restrictive, records from their July meeting show. 

“We really don’t know where the neutral rate is, which to me argues for caution,” Harker said. “Why would you rush up or down the hill in the dark? Take your time, and let’s feel our way.” 

The Fed’s rate cuts last year mean officials are closer to “neutral” than they were when borrowing costs were at a more than two-decade high. 

But economists like Daco argue there’s an urgency to move. He expects the Fed to cut rates one more time this year, though he believes a full percentage point of easing in 2025 could be warranted.

“Some support and buffer from monetary policy would be helpful,” Daco said. “Had it not been for tariffs, I would argue that inflation would be very close to 2 percent.”

Fed speak round-up: What officials on the FOMC have been saying about interest rate cuts

If the Fed cuts interest rates, will it even help consumers?

Anytime the Fed cuts interest rates, it carries big implications for your pocketbook. The Fed plays a role in influencing all borrowing costs in the U.S. economy, such credit card rates and the price you pay to finance a car or a home remodel.

But a quarter-point rate cut may not be very noticeable to the average consumer. Rates will still be relatively high. Besides the rapid shift in rates after the pandemic, the last time the federal funds rate was this high was 2022, a Bankrate analysis shows. 

The reason the Fed makes cuts also matters a great deal. When it cuts rates to support a weakening economy, like it is expected to do now, banks may become more restrictive in response, making it harder for consumers to borrow money. Consumers might also become more conservative with their spending, despite the lower interest rates, if they’re also worried about their job security.

“Even if the committee decides to cut rates, it will likely reflect a surrender to economic weakness rather than a clear win over inflation,” Kates said. 

Longer-term borrowing costs, such as mortgage rates, aren’t guaranteed to fall, either. Americans have seen this before. When the Fed cut interest rates last September, the 10-year Treasury yield rose almost a full percentage point by the time 2024 came to a close. 

Harker believes longer-term interest rates will stay elevated for some time as rising government debts and deficits flood the market with Treasury debt. He cites an estimate from the Budget Model at the University of Pennsylvania’s Wharton School of Business  — where he is now a professor — that the latest reconciliation bill signed by President Donald Trump will increase deficits by $3.2 trillion over 10 years. 

“As a result, those rates that people really care about are not coming down anytime soon. That’s my biggest concern,” he said. “People will say the Fed didn’t do its job. The Fed’s not equipped to do that.” 

If you’re wondering what to do with your money ahead of the Fed’s big meeting, here’s what to consider:

• Build up your emergency fund

  A weakening economy and softening job market often mean slower wage growth, fewer opportunities — and in some cases, job loss. That’s why financial planners recommend building an emergency fund that can cover at least six months of essential expenses. To build your cushion, consider cutting back on a few discretionary expenses — like streaming services, subscriptions or takeout — for a few months and redirecting that cash to savings.

• Keep your cash in a place where it can beat inflation

  With inflation rising again, your cash might be losing even more value if it’s kept on the sidelines in a savings or checking account earning little-to-no interest. High-yield savings accounts are still offering interest rates above the current rate of inflation, which can help you grow your emergency fund even quicker.

• Pay down high-cost credit card debt

  Credit card interest rates soared after the Fed hiked rates to combat inflation — and even after last year’s full percentage point of cuts, they’re still hovering above 20 percent. Consider using a 0 percent balance transfer card to consolidate and repay your debt interest-free over a set period. Or, if your balance is too large to manage on your own, a nonprofit credit counseling service may be able to help. These services often negotiate lower rates and give you a structured, affordable plan to pay down your debt over time.