Fed To Hold: July FOMC Meeting Unlikely to Yield Rate Cut

The Federal Reserve's upcoming FOMC meeting today and tomorrow, arrives at a critical juncture, marked by inflationary uncertainty, mixed economic signals, and unprecedented political scrutiny of the central bank's leadership.

All indications suggest that a rate cut is off the table for this meeting, with the Fed adopting a cautious “wait-and-see” approach.

The earliest plausible window for easing monetary policy appears to be September, contingent on a significant cooling of inflation and clarity on the economic impact of tariffs.

Since December 2024, the Fed has held the federal funds target rate steady at 4.25%–4.50%, resisting pressure to lower borrowing costs. Chair Jerome Powell has consistently emphasized the need for more data before considering any policy shift, particularly focusing on inflation reports and the evolving impact of tariffs implemented by the Trump administration.

This stance has been reinforced by the latest economic data.

The June CPI revealed a clear impact of tariffs on U.S. inflation, with core PCE for June accelerating, dampening market expectations for a September cut.

Between June 30 and July 15, the probability of a September rate cut plummeted from 93% to around 60%, reflecting growing uncertainty.

Adding to the complexity, the labor market remains surprisingly robust, with the unemployment rate edging lower in June. This strength provides the Fed with greater leeway to assess incoming data without the immediate pressure to stimulate the economy.

However, beneath the surface, there are signs of softening business sentiment and decelerating job growth, suggesting a potential slowdown in economic activity.

Divergence exists within the FOMC itself.

While some dovish members, such as Gov. Michelle Bowman and Christopher Waller, have advocated for initiating rate cuts as early as July, the majority of policymakers, including San Francisco Fed President Mary Daly, remain hesitant.

Daly has stated that it is “reasonable” to expect two rate cuts before the end of 2025, but not necessarily at the July meeting, emphasizing the ongoing uncertainty surrounding tariffs and fiscal policy.

The outlook for Chair Jerome Powell remains a focal point. Despite facing external political pressure, particularly from President Trump, Powell has reiterated his intention to serve out his term, and the President has softened his stance a little during his recent trip to the Fed, indicating he had no immediate plans to dismiss Powell, despite prior criticisms.

Tomorrow's meeting will be closely watched, with any clues relating to the outlook likely to be scrutinised with a fine tooth comb. Busy days ahead with earnings continuing at pace.