Key Takeaways
- Despite President Donald Trump’s persistent pressure, the Federal Reserve isn’t expected to cut interest rates in its meeting next week.
- Central bankers have said they are waiting to see how tariffs will move through the economy before they make any cuts.
- However, some Fed officials are diverging from the “wait-and-see” approach.
The Federal Reserve won’t lower interest rates on Wednesday, analysts say, but markets are watching for any signs that cuts may start in September.
Next week’s meeting comes as President Donald Trump ramps up his attacks on Fed Chair Jerome Powell for keeping the central bank’s influential interest rate high. The Fed has signaled that rate cuts may be needed, but officials have been waiting to see the economic impacts of Trump’s tariffs first.
The clarity they’ve sought hasn’t come, analysts say, giving Powell latitude to stick with the Fed’s wait-and-see approach for now.
“He’ll again emphasize patience,” Morgan Stanley Chief U.S. Economist Michael Gapen wrote in a note to clients, pointing to “considerable uncertainty” that tariffs bring to the economic outlook.
Right now, the economy doesn’t look much different than it did a few months ago. Employers kept adding jobs in June even if growth was softer. Inflation is much lower than it was a few years ago but it remains above the Fed’s 2% target—and tariffs raise the risk that it’ll stay elevated longer.
The Fed has held its benchmark interest rate between 4.25% and 4.5% this year, though officials have penciled in two cuts by year-end.
Markets see the Fed’s patience waning soon. According to the CME Group’s FedWatch tool, investors are pricing in a 62% chance of a rate cut in September. By then, the Fed will have the July and August jobs reports in hand, giving it evidence of whether the job market is cracking or staying resilient.
Some economists think September may be too soon for a rate cut and note the possibility that the Fed may not cut at all this year. Analysts expect Powell to share the same outlook as in past meetings: any decisions will depend on the data.
“The reality remains that the performance of the real economy also has a vote,” Ian Lyngen, head of U.S. rates strategy at BMO Capital Markets, wrote in a note to clients.
The Case For Rate Cuts
The Fed’s vote to keep rates flat may not be unanimous, given two Fed officials have leaned toward cutting rates this month.
Fed Governor Chris Waller, a potential Trump pick to replace Powell atop the Fed, laid out the case for a July rate cut in a speech this month.
The economy is showing signs of weakening even if it looks fine on the surface, he argued, pointing to private-sector jobs growing at “near stall speed.” Lowering the cost of borrowing for businesses and consumers could support the economy before it weakens further, he argued.
“We should not wait until the labor market deteriorates before we cut the policy rate,” he said.
He also indicated he’s not as worried about tariff-driven inflation, forecasting “one-off increases” in prices that won’t feed on themselves and thus prove temporary.
The Case for More Patience
Other Fed officials have shown more worry about those risks, noting that inflation has yet to return to the Fed’s 2% target even if it’s close to reaching that mark. The Fed’s preferred gauge rose by 2.7% in May, a far milder increase than the over 5.5% rise in the peak of the post-pandemic inflation surge.
“There is a risk that high inflation could burrow into consumer psychology and lead to unanchored inflation expectations,” Atlanta Fed President Raphael Bostic said in a speech this month.
Inflation remains “sanguine” at the moment, Bostic said, but that may reflect businesses delaying their price hikes until they can get more clarity on where tariffs settle out. Tariff-driven inflation “increasingly looks like a process that may take a year or more to fully play out,” Bostic said.
More Dissents May Be Ahead
Despite the growing divide within the Fed, most officials appear to be content to continue waiting, Bank of America analysts wrote in a note to clients. Powell also seems to be “in no hurry to cut,” they wrote.
However, the disagreements “may start a trend of more frequent Fed dissents,” they wrote.
Fed decisions are often unanimous or nearly unanimous. Any dissents that do occur typically come from leaders at the Fed’s 12 regional banks rather than the seven members of the Fed’s Washington, D.C.-based Board of Governors.
At a time when Trump is already attacking the central bank, “a more divided Fed may raise risks of a less consensus and more contentious institution,” they wrote.
Source link
