The Federal Reserve is wrestling with a decision on how aggressively to cut interest rates

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The Federal Reserve faces a close call next week on whether to cut US interest rates by a larger than expected half-point or go with a quarter-point, as officials grapple with how quickly to ease monetary policy.

Futures markets rallied as questions about the size of the cut came amid a more modest quarter-point reduction from the Fed when its key meeting ends on Wednesday.

Any cut next week would be the central bank's first in more than four years and would come with seven weeks until November's presidential election, after holding rates at a 23-year high of 5.25 percent to 5.5 percent since last July.

Top Fed officials have backed a series of interest rate cuts amid signs inflation is easing and they are focused on preventing undue economic damage from keeping borrowing costs higher than necessary.

How quickly to return to a “neutral” level that does not inhibit growth is the next question to answer.

A half-point rate cut in September would allow the Fed to return borrowing costs to normal levels more quickly, removing restraints on the economy and protecting the labor market from further weakness.

Krishna Guha, vice-chair of Evercore ISI, said a half-step move next week would “reduce the risk of a soft landing”.

Donald Cohn, the Fed's former vice-chair, said the central bank could adjust policy quickly even if it decided to move slowly next week, as inflation in 2022 proved more damaging than expected.

“By the speed at which they cut and the way they signal future cuts, they have an opportunity to make up if they wait too long,” he said.

Policymakers expressed no concern about the U.S. economic outlook but warned of growing downside risks. A rate cut at a recent meeting was considered by many to be “substantial,” the minutes showed. Since then, jobs and inflation data have become more supportive of cuts.

Fed Chair Jay Powell said last month that the central bank “will do everything we can to support a strong labor market as we make further progress toward price stability.”

Fed Governor Christopher Waller said last Friday that he was “open-minded about the size and pace of cuts” and would support a bigger cut “if the data suggests the need.” But he said he expected any move to be made “carefully”.

Also last Friday, New York Fed President John Williams said he was undecided on the size of this month's cuts but said the central bank was “well positioned” to meet its inflation and jobs targets.

“We will get together and obviously analyze and discuss everything,” he told reporters about the size of the first cut.

A more aggressive half-point cut by the Fed this month will bring risks.

Recent data has been mixed, with the most recent jobs report showing slower monthly growth but also lower unemployment and rising wages. Inflation data this week showed that price pressures are easing even in the “core” measure of the consumer price index that underpins volatile food and energy prices.

A half-point move could also cause concern as the central bank has become concerned about the economic outlook. That could prompt financial markets to cut rates more dramatically beyond the Fed's planned pace of easing.

“An argument can be made for 50 [basis points] But the communications around it are complex and there's no compelling reason to take on that challenge,” said Loretta Mester, who retired as president of the Cleveland Fed in June.

Republican presidential candidate Donald Trump has warned the Fed against any cuts in September, just weeks before the election, saying a deeper-than-expected cut would also risk political damage.

Powell recently said the Fed would “never use our tools to support or oppose any political party, politician or any political outcome.”

Futures markets suggest the central bank will cut interest rates later in the year, pointing to a half-point cut in one of the three remaining rallies.