July 31, 2025      

    With uncertainty still clouding the outlook, a majority of the Federal Open Market Committee (FOMC) voted to stay in a wait-and-see posture at the July 29-30 meeting, keeping the fed funds rate in a targeted range of 4.25% to 4.50%. Most committee members wanted to delay rate cuts until they gained more clarity on how tariffs would impact both inflation and the labor market. In contrast, a couple of officials advocated proceeding with rate cuts as they viewed the labor market as weaker than recently reported data seems to suggest and saw little risk of inflation from tariffs. These dissenting officials also felt that current rates were well above their neutral level, providing ample room to cut.

     The U.S. economy has held up relatively well despite trade tensions, suggesting rates may only be modestly restrictive, if that. After posting a negative growth rate in the first quarter due to front-running imports ahead of tariffs, the first estimate of second quarter GDP posted a quarter-over-quarter annualized gain of 3.0%. Recent data showed June’s retail sales, personal spending and industrial production rose more than expected. The Federal Reserve’s Beige Book, released two weeks before the FOMC meeting, summarized that overall economic activity increased slightly from late May through early July.

    Tariffs have to be paid by somebody. They could be paid by foreign producers, U.S. firms through reduced margins or the consumer in the form of higher prices. Economists have pointed out that some of the strength in June’s retail sales may have reflected tariff-driven price increases, particularly in furniture, household appliances, apparel, and toys. The Consumer Price Index (CPI) ticked up in June, a potential sign that companies are starting to pass tariff costs on to consumers. The Beige Book reported that businesses experienced “modest to pronounced input cost pressures related to tariffs, especially for raw materials used in manufacturing and construction.” Economists are forecasting that inflation will rise higher during the summer as businesses pass through some or all the increased costs to find consumers. The uncertainty about how far and for how long consumer goods prices will rise is a key factor, keeping the Fed on hold.   

     Ongoing economic and policy uncertainty has complicated business planning. Businesses have been generally cautious about hiring, providing some indication that demand for existing workers is eroding. The Beige Book also reported that employers in a few Fed Districts ramped up investments in automation and AI aimed at reducing the need for additional hiring. Federal job losses are also expected to accelerate in the wake of the Supreme Court ruling on July 7 that allowed the Trump administration can proceed with layoffs at nearly a dozen Federal agencies while legal challenges to the firings continue. Additionally, roughly 75,000 workers who accepted the Trump administration’s deferred resignation will fall off the payrolls in the fourth quarter.

      While the majority of the (FOMC) voted to hold rates steady, there were clear signs of a growing divide. Dissenting members see rates as highly restrictive despite economic growth in the second quarter and believe risks to the labor market overshadow the risks to inflation. They prefer to be proactive as the economy will likely lose momentum for the rest of the year as tariffs increasingly impact inflation, real disposable income and consumer spending. The Fed will see two more rounds of inflation numbers and two more Jobs Reports before their September meeting, potentially giving them clearer guidance. The financial markets are leaning toward a quarter point cut in September and White House pressure on Fed Chairman Powell to cut rates remains persistent, but for now the data just keeps getting in the way.