Fed Holds Rates Amid 2.7% Inflation, Markets Eye September Cut (62% Probability)

The U.S. Federal Reserve’s upcoming interest rate decision on July 30 has drawn significant attention from markets, with investors balancing optimism over economic resilience against concerns about persistent inflation. Despite a May inflation reading of 2.7%—above the 2% target—the central bank appears inclined to maintain its benchmark rate within the 4.25%-4.50% range, reflecting a cautious "wait-and-see" approach. Internal divisions among policymakers highlight the complexity of the decision, as officials debate whether to pursue immediate easing or delay action amid mixed economic signals. A Reuters poll indicates 100% of economists expect no rate cuts in the coming week, though the CME Group’s FedWatch tool suggests a 62% probability of a reduction by September [1].

Market optimism has been fueled by progress in trade negotiations, including potential U.S.-Japan and U.S.-EU agreements, which have eased concerns over President Trump’s August 1 tariff deadlines. This has contributed to record highs for the S&P 500 and Nasdaq indices, with analysts linking the surge to expectations of enhanced liquidity from potential rate cuts. The American AI Plan’s focus on technological innovation has further bolstered investor confidence. However, this optimism is tempered by divergent signals in bond markets: long-term Treasury yields, such as the 10-year and 30-year notes, rose to 4.417% and 4.959%, respectively, while two-year yields fell to 3.917%, signaling uncertainty about near-term monetary policy [1].

The cryptocurrency sector has also reacted to the anticipation of Fed action. Bitcoin (BTC) has surged to $117,987.74, with a 25.71% rise over 90 days and 60.49% market dominance, reflecting heightened speculation about global economic policy shifts. Analysts note historical correlations between digital asset flows and monetary easing, suggesting potential volatility as markets await clarity. The Coincu research team emphasized that regulatory developments and trade stability could further influence crypto markets, particularly if the Fed adopts a more accommodative stance [1].

Internal Fed dynamics underscore the policy dilemma. While Governor Chris Waller has advocated for a July rate cut to address signs of economic weakening, other officials remain cautious about inflation risks. Recent data, such as a stronger-than-expected June durable goods orders report, has complicated forecasts for future adjustments. Meanwhile, the Treasury Department’s upcoming refunding announcement on July 30 may impact bond markets, though analysts anticipate continued reliance on short-term debt instruments [1].

The U.S. dollar has gained strength amid the Fed’s policy uncertainty, showing resilience against the euro and Swiss franc. However, UBS forecasts further depreciation by mid-2026 as rate-cut expectations evolve [3]. Investors are now turning their attention to a data-packed week, including second-quarter GDP figures and July Non-Farm Payrolls, which could provide additional clarity on the Fed’s path. While a September rate cut remains a possibility, markets are pricing in a gradual approach rather than abrupt shifts, reflecting a balance between inflation control and growth support [1].

Source:

[1] https://www.tradingview.com/news/reuters.com,2025:newsml_L1N3TM0JZ:0-long-dated-yields-drift-higher-as-markets-eye-fed-trade-talks/

[2] https://www.investopedia.com/what-to-expect-from-the-fed-s-interest-rate-decision-next-week-11778885

[3] https://www.ubs.com/global/en/wealthmanagement/insights/chief-investment-office/house-view/daily/2025/latest-25072025.html