Fed Holds Steady, But Dissent Cracks the Door to September Cuts

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The Federal Reserve held interest rates steady at its July 30 policy meeting, keeping the federal funds target range at 4.25% to 4.50%, as widely expected. While the decision itself was unsurprising, subtle shifts in the Fed’s statement highlighted a cooling growth outlook and rising uncertainty, even as inflation commentary remained unchanged. Markets, which had priced in little chance of a July cut, reacted with muted moves, leaving attention firmly on Fed Chair Jerome Powell’s upcoming press conference for additional clarity.

Growth: From Solid to Moderate

The most notable change in the July statement came in the Fed’s description of economic activity. Whereas the June 18 statement said the economy had “continued to expand at a solid pace,” the July version downgraded that assessment to “growth of economic activity moderated in the first half of the year.” This shift acknowledges the visible cooling in momentum, particularly in labor markets where the pace of hiring has slowed. While the unemployment rate remains low and labor market conditions “solid,” the change signals that policymakers are more cautious about the sustainability of growth heading into the second half of 2025.

Inflation: Still Somewhat Elevated

On inflation, the Fed’s language was unchanged: “Inflation remains somewhat elevated.” This choice of words reflects a consistent narrative that, while inflation has cooled from its peaks, price pressures have not yet fully abated. The decision not to strengthen or soften this phrasing suggests policymakers are comfortable staying patient, even as tariffs place upward pressure on certain categories. Powell’s remarks later today are expected to shed more light on whether the Fed views these inflationary effects as transitory or as risks that could complicate its path toward rate cuts.

Risk Balances: More Caution

The Committee’s risk assessment also shifted modestly. In June, the statement noted that “uncertainty about the economic outlook has diminished but remains elevated.” By July, the reference to “diminished” was removed, with the statement simply saying uncertainty “remains elevated.” The adjustment underscores heightened caution, likely reflecting tariff-driven price volatility, geopolitical concerns, and mixed signals from the labor market. While subtle, the removal of “has diminished” signals that the Fed does not believe the risk landscape has meaningfully improved since the last meeting.

Dissent: Historic Division at the Fed

Adding intrigue to today’s decision were dissenting votes from Fed Governors Michelle Bowman and Christopher Waller, who both favored cutting rates by 25 basis points. This marks the first time since 1993 that two sitting governors have dissented at the same meeting, underscoring a significant internal divide. Waller had signaled a dovish stance heading into the meeting, while Bowman’s alignment amplifies pressure on Powell to explain why the Committee as a whole chose to hold steady. The dissent reflects growing debate over whether to move preemptively to support growth, particularly as labor market softness emerges, or to hold firm until inflation cools further.

Market Reaction: Muted, Awaiting Powell

Equity markets took the Fed’s decision largely in stride, with the S&P 500, Dow, and Nasdaq posting muted moves immediately after the release. Treasury yields were little changed, reflecting that a hold was the base case coming into the meeting. The U.S. dollar also steadied, after four days of gains earlier in the week. Traders are clearly waiting for Powell’s press conference for cues on how firmly the Fed is leaning toward rate cuts later this year.

CME Fed Funds Futures: September in Focus

The CME FedWatch tool shows traders now see a 68% chance of a 25-basis-point rate cut at the September meeting, up modestly from pre‑meeting levels. Looking further ahead, futures imply a 65% chance of at least another 25-basis-point cut in December, suggesting markets expect a total of 50 basis points of easing by year-end. That trajectory aligns with the view that, while inflation remains elevated, slowing growth and a moderating labor market could give the Fed room to cut. Powell’s guidance later today will likely determine whether those probabilities firm up or retreat.

Broader Context: Balancing Growth and Inflation

The July statement reflects the Fed’s ongoing balancing act. On one hand, the labor market remains resilient, and inflation hasn’t fully returned to target. On the other hand, growth has cooled, and the risks to the outlook remain elevated. By holding steady, the Fed is preserving optionality—signaling that it is neither rushing into rate cuts nor ruling them out if data continues to weaken.

The dissent underscores that internal pressure for cuts is building, with governors increasingly concerned about tariffs’ drag on demand and the risk of a more pronounced slowdown. Still, the Committee as a whole is signaling patience, keeping the focus on incoming data over the next two months, including two jobs reports and two CPI prints before the September meeting.

The Road Ahead

Investors will watch closely how Powell frames the July decision. If he emphasizes the slowdown in growth and heightened uncertainty, expectations for a September cut could rise further. If instead he focuses on the need for more evidence that inflation is sustainably returning to 2%, markets may trim those bets. For now, the Fed has held its ground, but the growing split inside the Committee makes September a pivotal meeting.

In short, July’s statement was no surprise in its outcome but notable in its tone: growth has slowed, risks remain elevated, and dissent is on the rise. For markets, Powell’s words this afternoon—not today’s hold—will likely set the tone for the weeks ahead.