Rate Cut Hopes Fade: Fed Minutes Hint Powell Won’t Blink at Jackson Hole

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The Federal Reserve’s July policy minutes struck a slightly more hawkish tone than markets had anticipated, reinforcing the sense that Chair Jerome Powell is unlikely to pre-signal an imminent rate cut when he delivers his closely watched address at Jackson Hole on Friday. While investors had been primed for evidence of growing support for a policy shift, the minutes revealed that only two officials—Governors Michelle Bowman and Christopher Waller—broke ranks in favor of an immediate cut. The overwhelming majority held firm, opting to keep the federal funds rate at 4.25% to 4.5%, underscoring that inflation concerns remain at the forefront of the central bank’s thinking.

The dissent itself was noteworthy. It marked the first time in more than three decades that multiple governors voted against a rate decision. Bowman and Waller argued that inflation, excluding the effects of Trump administration tariffs, was already near target, while signs of labor market fragility justified a preemptive policy adjustment. Their colleagues disagreed. The minutes made clear that “almost all” participants favored patience, noting the risks of acting before the full impact of tariffs and other uncertainties could be assessed.

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That split highlights the central tension running through the July discussions: the balance between lingering inflation pressures and emerging cracks in employment. The minutes noted that “participants generally pointed to risks to both sides of the Committee’s dual mandate, emphasizing upside risk to inflation and downside risk to employment.” Yet a majority judged inflation risk as more pressing. Several participants believed the effects of tariffs on consumer prices could persist longer than expected, raising the risk that expectations become unanchored. Others, however, worried that slowing consumption and softer job creation were early warnings of more substantial weakness ahead.

Inflation was the dominant theme. Officials acknowledged that disinflation had stalled, with headline PCE running at 2.5% year-on-year in June and core at 2.7%. Tariffs were cited repeatedly as a complicating factor, with “considerable uncertainty” about the timing and persistence of their effects. A couple of officials stressed that without tariffs, inflation was close to target. But many emphasized that the pass-through of higher costs to consumers was already showing up in goods categories, and that further price pressures could emerge as firms exhausted temporary buffers like inventory stockpiles or margin compression.

On the labor front, the Committee judged conditions “solid,” with unemployment holding at 4.1%. Still, there was unease beneath the surface. Some noted that job growth was slowing and becoming concentrated in less cyclical sectors. Reports from business contacts highlighted reluctance to hire or fire given policy uncertainty, while others pointed to rising youth and Black unemployment rates as early cyclical markers. A few participants flagged that tighter immigration policy was constraining labor supply in key industries, adding another layer of complexity.

Growth was another area of concern. Staff characterized the first half of the year as “tepid,” with consumption and housing both weaker. Several officials expected subdued growth to persist into the second half, even as household wealth and easy credit offered some offset. Others noted that business investment remained soft amid policy uncertainty, though sentiment had improved marginally. The housing market, in particular, drew attention, with falling prices and increased inventory hinting at flagging demand.

The financial stability section of the minutes carried its own warnings. Several participants highlighted “elevated asset valuation pressures,” especially in equities, where price-to-earnings ratios were at the high end of historical ranges. A couple underscored banks’ vulnerability to higher yields despite strong capital positions, while others cited fragility in Treasury market structure due to dealer constraints and growing hedge fund participation. Notably, many discussed the potential impact of payment stablecoins following the passage of the GENIUS Act, seeing both efficiency benefits and risks to Treasury demand and broader financial stability.

Markets slipped modestly following the release, though the reaction was muted relative to the weight of the discussion. Equities gave back early gains, Treasury yields edged higher, and futures markets pared expectations for a September cut. The message was clear enough: while the Fed acknowledges growing downside risks to jobs and growth, inflation remains the greater concern for now, and policymakers are in no hurry to pivot.

That sets the stage for Powell’s Friday speech in Wyoming. Markets had been hoping for a dovish tilt to open the door to September easing, but the minutes suggest he will tread carefully, emphasizing vigilance against inflation even as he acknowledges rising risks to the labor market. The timing is politically charged. President Trump has turned up pressure on the Fed, berating Powell and demanding more aggressive easing. Meanwhile, Trump’s tariffs are central to the inflation picture, complicating the Fed’s task. With another governor’s resignation giving the White House a fresh appointment, the central bank’s composition—and its independence—are increasingly part of the backdrop.

For investors, the takeaway is that the bar for a near-term cut remains higher than many assumed. The Committee is still split on how to weigh tariffs’ inflationary effects against a softening jobs picture, but the center of gravity is skewed toward patience. Unless incoming data decisively tip the balance, Powell’s message in Jackson Hole is likely to lean cautious. That could temper expectations of a September cut and reinforce the view that policy easing, when it comes, will be gradual and conditional.