Fed Meeting Preview: Powell Set to Hold Rates, September Cut Odds in Focus Amid Tariff Pressures

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The Federal Reserve convenes this Tuesday and Wednesday, with markets bracing for what could be a pivotal update in the central bank’s 2025 policy trajectory. The consensus is clear: the Fed will keep its benchmark rate unchanged at 4.25%–4.50%. CME Fed Fund futures place the odds of a move at just 3%, virtually assuring no action this week. But while the headline decision may be anticlimactic, the stakes are high. The real market mover will be Chair Jerome Powell’s statement at 2 p.m. ET on Wednesday and his press conference at 2:30 p.m., where traders hope for a clearer signal on whether a September rate cut is on the table.

Political Backdrop and Fed Independence

This meeting comes amid heightened political scrutiny. Former President Trump and his advisers have intensified criticism of Powell, accusing him of “playing politics” and dragging his feet on rate cuts. Reports that Trump even drafted a letter to remove Powell—though later denied—underscore the tension. The White House has also seized on the Fed’s costly headquarters renovation as evidence of mismanagement. While Powell has reiterated the Fed’s independence, political pressure will hang heavy over Wednesday’s press conference, with any perceived dovish tilt likely to be spun as caving to Trump.

Adding to the complexity, this week also features a wave of Treasury auctions and refunding announcements, further testing market appetite for U.S. debt at a time when issuance is rising and foreign demand has waned. These dynamics are already pushing long‑term yields higher, a backdrop Powell must navigate carefully.

Market Expectations: Steady Now, September Later?

According to the CME FedWatch Tool, markets assign a 64% probability to a quarter‑point cut at the September meeting. Historically, the Fed has never acted without at least a 60% implied probability in futures, suggesting that September is indeed live. Still, with tariffs clouding the inflation outlook, Powell is unlikely to pre‑commit. Instead, expect language emphasizing data dependence, with an eye on the two upcoming inflation and jobs reports before September.

Two potential dissenters—Fed Governors Christopher Waller and Michelle Bowman, both Trump appointees—are worth watching. Waller has openly signaled support for a cut now, while Bowman suggested in late June she’d back one “as soon as our next meeting.” If both dissent, it would mark the rare case of two governors breaking with the Chair, adding political and market intrigue.

Inflation and Tariff Uncertainty

Inflation is the Fed’s chief stumbling block. Recent CPI prints looked tame, but tariffs are beginning to filter through. June CPI showed the sharpest increase since February, with goods inflation driven by imported categories like appliances, furniture, and toys. Fed officials worry this could be the start of a summer uptick, with July–September CPI reports expected to show firmer monthly gains of 0.4%–0.5%.

The Fed still bears scars from 2021–22, when it misread inflation as “transitory” and later scrambled to tighten policy. Powell will want to avoid cutting rates prematurely only to face another inflation flare‑up. That’s why officials like Atlanta Fed President Raphael Bostic and San Francisco’s Mary Daly have urged patience.

The Labor Market and Growth Picture

The U.S. economy remains resilient despite tariff headwinds. Composite PMI hit its highest since December, and jobless claims are at their lowest since April. But a closer look shows concentration: nearly 90% of job growth in the past 30 months has come from government, leisure & hospitality, and private education/healthcare. Core cyclical sectors—manufacturing, construction, and tech—are lagging. That unevenness, combined with softer consumer confidence, suggests fragility beneath the surface.

GDP data offers a similar story. Q1 contracted at –0.5% annualized, but Q2 looks to rebound to ~2.5%, leaving first‑half growth at 1.0%. Still, the trajectory for H2 remains uncertain, especially with tariff‑related price increases threatening real disposable income.

Data Heavy Week Ahead

The Fed’s decision kicks off a whirlwind of critical economic data. Thursday brings the June Personal Consumption Expenditures (PCE) report, the Fed’s preferred inflation gauge. Analysts expect headline PCE at 2.7% YoY, with risks skewed higher on tariffs. Friday delivers the July jobs report, a potential tipping point for September expectations. Together, PCE and jobs will either cement or erode the case for a September cut.

Layered on top are Treasury refunding announcements, expected to confirm heavy issuance for H2. With global demand for U.S. debt ebbing, especially from China and Japan, upward pressure on long‑term yields could complicate Powell’s effort to sound dovish without sparking a bond selloff.

Scenarios and Market Reactions

Dovish Powell, No Cut

• Markets lean into September cut expectations.
• U.S. dollar softens; equities and gold catch a bid; long yields steady.

Two Dissents, Dovish Tilt

• Heightens anticipation for September action.
• Risk assets rally, but dollar weakness depends on Powell’s tone.

Hawkish Powell, Emphasizing Tariff Risks

• September cut odds fade; markets push easing into December.
• Dollar strengthens; equities and gold retreat.

December vs. September Cut Debate

Many on Wall Street think the September cut is more likely, but a December timeline can’t be ruled out. For Powell, the calculus is simple: two more months of inflation and jobs data by September may provide enough cover, but if tariffs spark stronger inflation, the Fed may delay until year‑end. That delay could also align with the Fed’s historical preference to move in larger chunks, such as a potential 50‑bp cut in December if conditions deteriorate.

Final Take

This week’s Fed meeting may not deliver fireworks in the policy rate, but it could shape the market’s trajectory for the rest of 2025. Powell faces a delicate balancing act: acknowledging the risks tariffs pose to inflation, defending the Fed’s independence under fierce political pressure, and providing just enough dovish guidance to keep September alive. With PCE data and jobs figures set to drop within 48 hours of the decision, the market’s verdict on whether Powell has threaded the needle will come swiftly.