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The Federal Reserve will announce its next interest rate decision on Wednesday, July 30th at 22:00 (GMT+4). Financial markets are pricing in another rate hold at 4.5% due to a surge in inflation and trade war concerns, which continues to support the Fed’s cautious stance.
Fed Chair Jerome Powell stated that for the Fed to start cutting rates, inflation must continue to trend downwards and the labor market needs to weaken.
However, the inflation report for June saw a rise in prices due to the ongoing trade war triggered by the US. That spike in inflation has kept the Fed cautious about making changes to monetary policy.
Inflation and Growth
The Fed’s dual mandate complicates its decision, with inflation remaining a concern due to price pressures from tariffs. The labor market, however, remains resilient. This stability reduces the urgency for rate cuts as a strong labor market doesn’t lead to changes in monetary policy.
Fed officials Waller and Bowman have divided opinions, where they are focusing on unemployment risks, whereas if unemployment rises, the Fed may need to act on cutting rates. ⁽¹⁾
During the semiannual testimony to Congress, Fed Chair Powell faced scrutiny from Republicans, who are pushing for rate cuts, citing low inflation and global central banks’ actions to cut rates.
Powell stated that the Fed needs to remain cautious in order to determine the effects of tariffs. Powell also noted that economic forecasts expect inflation to rise in 2025, where inflation is expected to rebound to 3%, before declining back around 2.4% in 2026. ⁽²⁾
Forecasts for growth were revised downwards in 2025 to 1.4% from 1.7% as global risks continue to loom. ⁽³⁾
Divided Sides at the Fed and Political Pressure
The Fed seems to have divided opinions on the timing and extent of rate cuts.
Governors Chris Waller and Michelle Bowman, both appointed during President Trump’s first term, have expressed their opinions for a rate cut at the July meeting. They believe that tariff-driven inflation could have short-term impacts, which could fade by next year, but expressed concerns on signs of a weakening labor market.
The FOMC Minutes indicated caution, which prioritized its dual mandate of price stability and maximum employment. ⁽⁴⁾
President Trump has pressured Jerome Powell, criticizing the Fed’s delay in cutting interest rates. Trump stated that high interest rates are pressuring the federal government with increased interest payments on US debt.
President Trump also called for Powell’s resignation as Fed chairman, whose term ends in May 2026. Fed Governor Waller is seen as a potential successor. ⁽⁵⁾
Despite the political pressure, Powell remained focused on data-driven decisions and ignored the president’s criticism.
Market Expectations for a September Rate Decision
Markets are mostly focused on the September meeting, where a rate cut might occur.
The CME FedWatch Tool shows a 60% probability of a 25-basis point rate cut in September. The chances for a July cut are below 5%.
CPI for June showed an increase of 2.7% YoY, which indicates that inflation remains well above the Fed’s 2% target, fading hopes of a rate cut. The rise in inflation supported the Fed’s cautious stance due to tariff impacts. ⁽⁶⁾
Fed Chairman Powell will speak in a press conference after the decision announcement and could provide insights on the current economic situation and forecasts. It could also hint at a September rate cut depending on the data.
Looking Ahead
The Fed remains at a crossroads, balancing the risks of rising inflation with the strong labor market. Fed Chair Powell’s leadership could be put to the test as trade wars and political pressure continue to weigh on the central bank.
Financial markets expect the first rate cut to come in September, with a 50 basis-point reduction expected by year-end.
The July meeting is unlikely to change anything, but could determine future action for the Fed as it continues to monitor economic data.
