Markets expect the Federal Open Market Committee to hold interest rates steady at the conclusion of their next scheduled decision on July 30. That’s because the job market appears robust, with unemployment holding in a 4.0% to 4.2% range for the past year, while inflation remains a little above target. President Trump has expressed his desire for lower rates, in part as a way to lower government interest payments, but for now, the FOMC has focused on their interpretation of economic conditions in setting interest rates.
What The Markets Expect
Fixed income markets see only a small chance of an interest rate cut at the July meeting according to the CME FedWatch Tool the chance of a cut is barely 5%. However, a cut at the subsequent September meeting is seen as probable, with an October cut also likely. As such, interest rate cuts are still expected in 2025, but expected closer to the end of the year. If so, the FOMC may adjust their language to imply a cut is likely coming in their July statement.
President Trump’s Impact
President Trump has been vocal in calling for lower rates, and has repeatedly criticized Fed Chair Jerome Powell, going as far as to call for his resignation on July 2. Trump does not have the ability to fire Powell and statements about removing Powell in April arguably contributed to stock market volatility.
However, Powell’s term as Fed Chair is set to expire on May 2026. As others seek Trump’s approval for the nomination to Fed Chair next year, it’s possible there is more public posturing for lower interest rates from policymakers, since Trump wants to appoint a Fed Chair who will cut interest rates.
Nonetheless, Powell and Trump’s positions are slightly different, Trump is arguing for lower interest rates primarily to help lower the cost of servicing the government debt. In contrast, the FOMC’s mandate is maintain stable prices and full employment. This means that the FOMC would likely look for signs that inflation is well under control or the job market is weakening before cutting rates. Lowering the cost of government debt is not part of the FOMC’s mandate. Plus, the Fed only directly controls short-term interest rates, longer-term interest rates, which make up the bulk of the cost of servicing government debt are shaped by a broader set of market forces.
The Impact of Tariffs
The FOMC continue to monitor tariffs as a potential source of incremental inflation. For now, inflation has remained subdued. However, policymakers expect the impact of tariffs may take several months to appear in economic data.
Overall tariff policy remains uncertain. Tariffs may increase in the coming months as Trump announced letters to various countries signalling potentially higher tariffs on July 7.
What To Expect
Absence unexpected economic data, the FOMC may hold rates steady in July, but cuts may be coming at subsequent meetings. Cuts could occur because inflation remains subdued, as it has in past months, or if risks to employment were to surface.