Fed Stands Firm as Tariffs and Stablecoins Challenge Inflation Control

Federal Reserve officials expressed deep concern during their July 2025 meeting about the economic uncertainty created by U.S. tariff policies and the potential for inflation to remain persistently elevated, despite the labor market remaining robust. The Federal Open Market Committee (FOMC) decided to keep the federal funds rate unchanged at 4.25%-4.5% by a vote of 9-2, with dissenting votes from Governors Michelle Bowman and Christopher Waller, who favored a rate cut to address employment risks [1].

The meeting minutes, released on August 20, 2025, underscored the divergent views among policymakers, with a majority emphasizing the greater risk of inflation overshooting the 2% target. The central concern was the potential for tariffs to unanchor inflation expectations, particularly as data showed goods price inflation rising while services inflation continued to moderate [1]. Policymakers acknowledged that the full effects of higher tariffs on consumer prices might be delayed due to factors such as inventory stockpiling, slow cost pass-through, and ongoing trade negotiations [1].

Compounding the inflationary pressures was the recent downward revision of nonfarm payrolls data, which showed significantly weaker employment gains in May and June than initially reported. The July job growth was also below expectations, raising concerns about a potential weakening in the labor market. Despite this, the FOMC noted that the unemployment rate remained low and labor market conditions were still near maximum employment [1]. The divergence in views was evident, with some participants cautioning against interpreting slowing payroll growth as a sign of economic slack, particularly in light of reduced immigration affecting both labor supply and demand.

Participants also highlighted the growing use of payment stablecoins, mentioned eight times in the minutes, as a potential area of financial innovation and risk. The recent passage of the GENIUS Act (Guiding and Establishing National Innovation for U.S. Stablecoins Act) was expected to facilitate the development of a regulatory framework for stablecoin issuers while addressing vulnerabilities related to asset backing and monetary policy implications [2]. The Treasury Department’s request for public comment on the Act emphasized the need to evaluate the effectiveness, costs, and risks associated with using advanced tools like AI and blockchain in detecting illicit activity involving digital assets [4].

The meeting occurred against a backdrop of political pressure from President Donald Trump, who has publicly criticized Fed Chair Jerome Powell and demanded rate cuts. Trump’s administration is actively reshaping the Federal Reserve, including through the resignation of Governor Lisa Cook amid allegations of mortgage fraud and the potential appointment of new governors [1]. Powell’s upcoming speech at the Jackson Hole symposium is widely anticipated to clarify the Fed’s short-term rate path and longer-term policy outlook amid these pressures [1].

Financial market conditions remained relatively stable, with equity prices rising and credit spreads tightening. Investors interpreted recent geopolitical de-escalation and stronger-than-expected economic data as positive signals. The VIX volatility index, a key measure of market anxiety, declined to near its historical median, reflecting improved risk sentiment [2].

The FOMC concluded that the uncertainty surrounding the economic outlook remained high, with policymakers emphasizing the need to closely monitor incoming data, particularly in light of the potential for inflation to rise further. The decision to hold rates steady reflected the belief that the current policy stance was appropriate given the balance of risks, though several participants expressed openness to adjusting policy as needed in response to evolving conditions [1].

As the Fed moves forward, it faces a delicate balancing act: addressing inflation risks without exacerbating employment concerns, while managing the long-term implications of tariffs and digital financial innovation. The next FOMC meeting on September 16-17 will provide further insight into whether the Fed will follow market expectations of a rate cut later this year [1].

Source:

[1] Fed minutes August 2025 (https://www.cnbc.com/2025/08/20/fed-minutes-august-2025.html)

[2] The Fed - Monetary Policy: Minutes of the Federal Open Market Committee (https://www.federalreserve.gov/monetarypolicy/fomcminutes20250730.htm)

[3] Fed's July minutes show tariff inflation concerns kept rates ... (https://www.foxbusiness.com/economy/fed-minutes-show-tariff-inflation-fears-outweighed-jobs-market-july-rate-decision)

[4] Treasury Issues Request for Comment Related to the Guiding and Establishing National Innovation for U.S. Stablecoins (GENIUS) Act (https://home.treasury.gov/news/press-releases/sb0228)