July FOMC recap—still waiting and seeing

In a widely anticipated move, the Federal Open Market Committee (FOMC) left the target range for the fed funds rate unchanged at 4.25% to 4.50% in their recent meeting. Federal Reserve (Fed) Board members Christopher Waller and Michelle Bowman (both nominated to the Board by President Donald Trump) voted against the decision, instead favoring a 0.25% reduction. This marks the first time since 1993 that multiple members of the Board of Governors have issued dissenting opinions, though recent dovish comments from both made their opposition unsurprising. Absent and not voting for personal reasons was Board of Governors member Adriana Kugler, leaving the final tally at 9-2 in favor of holding tight.

The most notable change in today’s statement was in the characterization of economic activity. Since January 2024, the committee had described the economy as “expanding at a solid pace.” In contrast, today’s statement noted that activity has “moderated in the first half of the year,” reflecting the fact that real GDP has averaged 1.2% (annualized) thus far in 2025 after a growing by 2.5% in 2024.

At the press conference, Fed Chair Jerome Powell’s prepared remarks brought the committee’s assessment of the dual mandate into focus. Throughout the event, he described the labor market as “broadly in balance and consistent with maximum employment”; in other words, currently fulfilling one side of the dual mandate. Citing recent softening trends in both labor demand (reflected in lower monthly job creation), and labor supply (due to reduced immigration flows), Powell emphasized the unemployment rate (currently at 4.1%) as the most important metric in assessing the overall health of the labor market. On inflation, Powell acknowledged that, despite recent progress, it remains “a bit above target,” with significant uncertainty still emanating from trade policy. He went on to characterize the current stance of policy as “moderately restrictive,” noting that, while downside risks to the labor market exist, most committee members believe that moderately restrictive policy remains appropriate until the effects of tariffs on inflation are more fully understood.

The market interpreted Powell’s emphasis on inflation as a hawkish signal, further reducing the likelihood of a September rate cut, which now stands at roughly even odds. With two additional inflation and labor market reports scheduled for release before the September meeting, the onus is on the incoming data to prompt the committee to move away from its current “wait-and-see” approach.

In our view, while the decline in the June unemployment rate might initially suggest a tightening labor market, a broader array of indicators points to a lack of underlying dynamism and continued moderation in wage pressures. Moreover, recent job gains have been concentrated in sectors that typically lag the business cycle, such as the public sector and health care. The Q2 GDP report released earlier today underscored a pronounced slowdown in both real and nominal private demand during the first half of 2025 compared to previous years. This softening in demand limits companies’ ability to pass on tariff-related price increases. Although the deregulatory environment emerging from Washington, D.C., may bolster business sentiment and capital spending going forward, such measures are more likely to support trend growth than generate inflationary pressures on their own.

Should our outlook prove correct—that the coming months will bring an uptick in the unemployment rate and more moderate tariff-related price pressures than might be currently anticipated—Chair Powell could use his appearance at the annual Jackson Hole Symposium in late August to lay the groundwork for a September rate cut. Alternatively, if the committee judges that additional time is warranted, the FOMC’s median projections from the June Summary of Economic Projections could still be achieved with 0.25% rate cuts in October and December, or even a 0.50% cut in December. With rate cuts on the horizon, high-quality fixed-income should remain well supported, continuing to offer attractive risk-adjusted returns, particularly in the intermediate segment of the yield curve.