Fed likely to hold rates steady despite political pressure, markets eye possible cut in September

Federal Reserve

Despite mounting pressure from the White House, the U.S. Federal Reserve is likely to keep its key policy rate unchanged in its meeting on July 30. The Fed's Federal Open Market Committee (FOMC) has kept interest rates unchanged at 4.25 percent to 4.5 percent for the past four sessions.

The move is likely to come even as U.S. President Donald Trump has been vocal with the Federal Reserve Chair Jerome Powell for standing pat on rates. Instead, the President wants the country's benchmark lending rate to be three percentage points lower, arguing that the Federal Reserve is keeping the cost of debt high, stymieing economic growth.

However, the Fed Chair has noted that with the uncertainties caused by the President's tariff decisions, it is important to await further data to make an appropriate move. As inflation in the U.S. heats up, at 2.7 percent, according to the latest data, it is unlikely to see a rate cut.

“The key change since the last FOMC meeting is that the activity data have begun to show clearer signs of the below-potential growth that we and most forecasters have expected since it became clear in the spring that large tariff increases were coming,” said Goldman Sachs, in a note.

The international brokerage added, “We still expect a cut in September but do not expect a strong hint this week. If asked about the two-cut baseline in the June dots, Chair Powell will likely acknowledge it but note that there are two rounds of inflation and employment data before September and that decisions will be made meeting-by-meeting.”

According to the CME Group’s FedWatch tool, investors too, do not anticipate a rate cut in the Fed’s July meeting. 98 percent of participants believe that the current rate will be maintained, while only two percent believe there could be a cut.

Regarding the outlook for the year, even the Federal Open Market Committee sees significant division in the rate cut trajectory for 2025. According to the latest Summary of Economic Projections, seven FOMC foresee no cuts for the year, while eight are pencilling in two cuts of 25 basis points each.

Accordingly, the CME Group’s FedWatch tool noted that 65 percent expect a 25 basis points cut in the September meeting, while 34 percent expect to see no cuts in the meeting. Only one percent of participants expect a cut of 50 basis points in September.

"The Fed is likely to wait for meaningful signs of weakness in the labor market before acting (while also looking-through transitory one-time price increases due to tariffs), which implies that the next cut may only arrive in September," said Madhavi Arora, economist at Emkay Global.

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