Fed Holds Rates, Dow Drops 0.83% Amid Internal Divide

On the evening of July 31, Beijing time, U.S. stocks closed lower. The Federal Reserve kept interest rates unchanged, but for the first time since the end of 1993, multiple members voted against the rate decision. Federal Reserve Chairman Powell stated that the central bank has not made any decision on a possible policy adjustment in September.

The Dow Jones Industrial Average fell 370.50 points, or 0.83%, to 44,262.49. The Nasdaq Composite fell 66.15 points, or 0.31%, to 21,032.14. The S&P 500 fell 34.48 points, or 0.54%, to 6,336.38.

The Federal Reserve, which has been divided internally, withstood intense criticism from Trump and dissent from two senior officials to decide to keep the benchmark interest rate unchanged. The Federal Open Market Committee, which sets the overnight borrowing rate, voted 9 to 2 to pause, keeping the federal funds rate in the range of 4.25% to 4.5%. Although this rate only determines the cost of overnight borrowing between banks, it affects the entire economic system's cost of funds.

However, this decision was opposed by two members, Michelle Bowman and Christopher Waller, who advocated for a rate cut to reflect controlled inflation and the prospect of a weakening labor market. This is the first time since the end of 1993 that multiple members have voted against a rate decision.

In the post-meeting statement, only minor adjustments were made to the economic assessment: "Despite continued volatility in net exports affecting data, recent indicators show that economic activity growth has slowed in the first half of the year. The unemployment rate remains low, the labor market remains robust, and inflation remains high."

Compared to the optimistic assessment at the June meeting that the economy was "continuing to expand steadily," this statement said that uncertainty "remains high," which is more cautious than the previous statement that it "has eased but remains high."

Although economic slowdown may strengthen the case for a rate cut, the committee did not explicitly support this view. While the market generally expected the Fed to hold steady this time, it closely watched the extent of the split among the 12 members of the committee (with member Adrianne Kugler absent this time). Traders expect a rate cut in September, but this will depend on the data. The June dot plot had suggested two rate cuts this year.

This institution, which is crucial to the economy but has traditionally stayed away from political turmoil, is under unprecedented pressure. Trump not only demanded Powell's resignation but even considered using legally questionable means to fire him. Although the threat of dismissal has been temporarily averted, the president continues to criticize Powell, whom he personally appointed but now calls "Mr. Dullard." Trump advocates that the Fed should cut rates by three percentage points to ease the rising burden of national debt interest and boost the sluggish housing market.

In addition to the pressure on interest rates, the Trump administration also accused Powell's Fed of serious overspending on a renovation project for two buildings in Washington. Powell emphasized that the overspending was due to cost increases, not mismanagement.

Data released by the Commerce Department on Wednesday showed that the second-quarter GDP annualized growth rate was 3%, far exceeding expectations. Although the increase was mainly due to a rebound in imports after a surge in the first quarter due to tariffs, the report still confirmed the stability of the economic foundation. More importantly, the Fed's core forecasting tool showed that the inflation rate for the same period was only 2.1%, and the core inflation rate was 2.5%, a significant drop from the first quarter and close to the 2% policy target.

White House National Economic Council Director Hassett said on the same day: "We fully respect the independence of the Fed, but we also hope to respect their analysis and judgment. We expect the Fed to soon follow the data, which will be a major positive." The Fed's next meeting will be held in late August in Jackson Hole, Wyoming, where the chairman will deliver an important policy speech as usual.

Before the Fed announced its rate decision, U.S. President Trump again called for a rate cut. After the release of the second-quarter GDP data for the U.S., Trump said on the Truth Social platform that "Powell must cut rates now. There is no inflation."

Despite facing intensified political pressure, Powell has consistently signaled patience in interest rate decisions. Financial markets expect the Fed to adjust monetary policy no earlier than September.

At a press conference after the Fed's monetary policy meeting on Wednesday, Powell said that although economic growth has slowed, the Fed is prepared to take action if necessary. He also emphasized that the central bank has not made any decision on a possible policy adjustment in September. "We believe that the current monetary policy stance allows us to respond to potential changes in the economic situation in a timely manner," Powell said. He also specifically pointed out that the Fed needs to confirm that Trump's tariff policy will not become a major inducement for inflation.

The Fed's decision to keep the benchmark interest rate unchanged comes as Trump continues to pressure Powell to ease monetary policy. Powell has consistently maintained that whether to lower the current overnight rate of 4.25% to 4.5% will depend entirely on the data.

Ryan Welden, investment director and portfolio manager at IFM Investors, analyzed: "Although the Fed kept rates unchanged in July, the two dissenting votes highlighted the division within the decision-making body over the potential economic and inflationary impact of tariffs. Although inflation data remains the Fed's primary consideration in its dual mandate, as the August 1 tariffs take effect and the economy adapts to the new normal, employment issues may receive more attention."

Trump announced on Wednesday that he would impose an additional 25% tariff on goods imported from India and attach "a penalty." Trump also made it clear that he would not extend the deadline for resuming "reciprocal tariffs" on multiple countries, which was originally set for August 1. He emphasized on the Truth Social platform: "August 1 is August 1—this deadline is as hard as a rock and will not be extended. An important day for the United States has arrived!!!"

This is the third time Trump has made a statement about the tariff deadline. In early April, he announced that he would impose a 10% base tariff on the entire world and impose up to 50% differentiated tariffs on dozens of countries. After sparking strong international reactions, Trump announced on July 9, 90 days before the effective date, that he would temporarily suspend implementation, claiming at the time that he would "absolutely not extend the deadline." However, he signed an executive order two days before the deadline to postpone it to August 1.

The latest presidential letter revealed that Trump had sent letters to more than 20 national leaders, clearly stating the new tax rate their goods would face starting in August.

On the trade negotiations front, U.S. negotiators have concluded consultations with the Chinese side, and the suspension of tariffs remains uncertain. U.S. negotiators said that unless Trump ultimately approves the plan, the decision to delay the tariffs will not take effect.

According to CCTV, on the evening of July 29, Li Chenggang, China's international trade negotiator and vice minister of commerce, said in Stockholm, Sweden, that based on the consensus reached in the new round of economic and trade talks, both sides will continue to promote the suspension of the 24% reciprocal tariffs by the U.S. side and China's countermeasures as scheduled.

Earlier, Trump announced on Sunday that the U.S. and Europe had reached a trade agreement, imposing a 15% tariff on most European imports, including cars. Trump added on Monday that the global base tariff rate would be "set between 15% and 20%."

Market attention remains on U.S. corporate earnings. Starbucks' stock price surged as the company's third-quarter revenue exceeded expectations. Payment giant Visa's quarterly results were better than Wall Street's estimates. Tech giants Meta Platforms and Microsoft will release their earnings reports after the market closes.

Other companies reporting earnings on Wednesday include e-commerce platform Etsy, Ford Motor Company, and retail trading platform Robinhood.

Chris Weston, head of research at Pepperstone, said: "Overall, U.S. earnings for the quarter have been solid, but these tech giants must 'shine' to meet the already high market expectations."

Economic data released on Wednesday showed that the U.S. private sector added more jobs than economists expected in July. According to data released by the ADP Research Institute in collaboration with the Stanford Digital Economy Lab, private sector employment increased by 104,000 in July (estimated to increase by 76,000); the June data was revised to a decrease of 23,000. The forecast range for 28 economists was an increase of 25,000 to 180,000. Employment in the goods-producing sector increased by 31,000. Employment in the service-providing sector increased by 74,000.

The U.S. Bureau of Economic Analysis reported that the U.S. GDP fell 0.5% in the second quarter. The forecast range for 69 economists for the second-quarter GDP was an increase of 0.8% to 4.5%. Personal consumption grew 1.4% in the second quarter, compared to 0.5% in the previous quarter. The GDP price index increased 2%, compared to 3.8% in the previous quarter. The core personal consumption expenditure price index increased 2.5% from the previous quarter, compared to 3.5% in the previous quarter.

Although U.S. mortgage rates have remained virtually unchanged for several weeks, the current factor inhibiting consumer demand is not interest rates. What is truly causing concern is the uncertainty of the economic outlook, which is preventing some people from making major financial decisions. For this reason, the Mortgage Bankers Association's seasonally adjusted data showed that the total number of mortgage applications in the U.S. last week decreased 3.8% from the previous week.

The average contract interest rate for 30-year fixed-rate mortgages that meet the 80.65 million loan limit fell slightly from 6.84% to 6.83%. Including origination fees, the loan fee points for a 20% down payment fell from 0.62 to 0.60.

MBA's vice president and deputy chief economist Joel Kan said: "The continued uncertainty in the economy and job market is affecting the decisions of potential homebuyers."

Focused stocks include AMD, whose target price was raised from 175 to 200 by Bank of America Securities before the release of its second-quarter financial report, citing the strong growth momentum in the artificial intelligence and CPU markets. The new target price is still nearly 13% higher than the current stock price.

Bank of America analyst Vivek Arya, who maintains a "buy" rating, expects AMD to gain a significant share of the CPU and AI GPU markets by 2026. Currently, AMD's market share in the CPU market is less than 20%, but Arya expects this number to exceed 30% by 2026.

Arya specifically pointed out the development opportunities in the GPU business, especially after the improvement in the trade environment with China. It is expected that AMD will resume supplying AI GPUs to the China region in the second half of 2025, which could bring an additional 700 million to 1 billion in revenue next year.

Starbucks' third-quarter revenue exceeded expectations. Visa's third-quarter performance was strong but did not raise its full-year performance guidance, disappointing the market. Electronic Arts' first-quarter earnings and revenue exceeded expectations. HSBC Holdings' second-quarter performance was below expectations, and it announced a share buyback of up to 3 billion. Sony and Honda Motor are accelerating their plans to launch electric vehicles in the U.S. market.