EXPECTATIONS: The Federal Reserve is widely expected to keep rates on hold in July, with the latest Reuters Poll finding all 105 economists surveyed looking for this outcome. Money markets are also largely pricing in a hold, with just a 3% probability of a 25bps rate cut.
Polymarket is even more reserved, with traders in the online betting platform giving only 2% odds to a rate cut.
With a hold largely expected, and hinted at in recent commentary, attention will turn to any potential dissent(s), given that both Governors Waller and Bowman have previously argued for a rate cut as soon as the July meeting. If both dissent, as Goldman, Deutsche and Morgan Stanley expect, it will be the first time two governors have dissented since 1993.
Looking ahead, economists are more split, with 56 of 105 economists surveyed expecting a rate cut in September (at the time of writing, money markets price in approximately 17bps of easing, which implies a 68% probability of a 25bps rate cut). Goldman expects three 25bp rate cuts this year in September, October, and December, followed by two more in 2026 to a terminal rate of 3-3.25%. Our funds rate scenario analysis implies that our probability-weighted Fed forecast remains dovish relative to market pricing.
The Fed has been reluctant to commit to future moves, but it would be key if they gave some guidance for the September confab, or if Powell alluded to such a move; still, Morgan Stanley highlights that he will likely state it is a long time until September, with plenty of data due between now and September 17th.
RECENT DATA: Inflation data has recently been benign with little evidence of inflation skyrocketing higher in the face of tariffs, albeit the June data did show the start of the impact, with goods inflation rising 0.7%. There is still uncertainty ahead regarding the impact of tariffs on inflation, with some fearing it will have a permanent impact, but the doves argue that it will be a one-time increase. However, Trump’s scattered tariff approach only pushes back the time until the Fed will have a clearer understanding of the inflation impacts from trade policies – Goolsbee, for instance, has said it could delay rate cuts. The labor market has been “solid,” with no signs of a sharp deterioration, though the latest Beige Book noted that reports of layoffs were more common among manufacturers, but limited in other sectors (more below). Something to be aware of in the Q&A is that Powell may be quizzed about the accuracy of US data. A recent Reuters poll found that 89 out of 100 economists polled by Reuters were concerned about the quality of official US economic data, with 41 saying they are very concerned. Oddly enough, none of them were concerned about data accuracy during the Biden admin – go figure. Meanwhile, 71 of the 87 surveyed believe the US authorities are not treating challenges of economic data accuracy with sufficient urgency, with 66 stating that they are worried about the impact of US statistics quality on Federal Reserve policy-making.
According to Goldman, the most notable change since the June FOMC meeting is that the activity data have begun to show clearer signs of the below-potential growth that most forecasters have expected since it became clear in the spring that large tariff increases were coming. Concerningly, this deceleration has occurred before the drag from the trade war has likely peaked. While this has strengthened the case for rate cuts, the inflation and employment data and the range of views among FOMC participants have left the timing of the first cut an open question for now.
FOMC STATEMENT: Below we share Morgan Stanley’s expected changes to the FOMC statement in July. Strikethrough text represents deletions from the June statement and bolded text represents new language we expect to be added in the July statement. The bank expects no material changes in the statement. In addition to the description of the incoming data, the committee will retain its assessment about uncertainty – “remains elevated” – though the reference to “diminished” uncertainty can be removed given the amount of time that has elapsed since “Liberation Day” in early April. In addition, with additional tariffs forthcoming on August 1, some committee members may be worried about a re-escalation in trade tensions. Beyond this, the language that “the committee is attentive to the risks to both sides of its dual mandate” is generic enough to not warrant any changes. As it becomes clearer which way the economy is evolving versus the dual mandate, the Fed may alter its assessment of the balance of risks, but that will take time.
It’s also worth noting that Q2 GDP will be released on Wednesday morning, and FOMC statements after GDP releases often summarize the results in the first paragraph. The FOMC will likely follow what has become a widespread practice among economists this year of averaging Q1 and Q2 growth and according to Goldman, the Fed is likely to acknowledge the softer growth pace in the first half of the year, downgrading its assessment of growth from a “solid” to a “moderate” pace. It is also likely to remove the comment that uncertainty “has diminished” because the renewed threats to raise country-specific tariff rates have if anything increased it. Here is what the statement redline will look like according to Goldman:
POWELL PRESS CONFERENCE: In the press conference, Chair Powell will probably be asked whether the two cuts in 2025 implied by the median June dot is still the baseline. He will likely acknowledge the June median but note that there are still two rounds of inflation and employment data ahead of the September meeting and reiterate that decisions will be made on a meeting-by-meeting basis. A plausible more dovish alternative would be for him to endorse two cuts as still the median view on the FOMC while acknowledging the range of views. According to Goldman, do not expect Powell’s press conference to provide any firm hints about September
RECENT COMMENTARY: The majority of the Fed continues to favor a wait-and-see approach, but a minority (Waller and Bowman) have suggested they are open to a rate cut in July. Looking ahead, some have indicated they would be more prepared to cut in September, providing inflation remains benign. Some have also indicated that it can cut and then hold to see how the impacts of tariffs play out. Goolsbee has made the argument that Trump’s latest tariff threats could delay the Fed’s resumption of rate reductions as the Fed still will not have a clear picture until August, and then tariffs would need to work their way through the economy. A July rate cut seems unlikely based on recent commentary, and although Waller has not committed to such a move, as he will debate views with others at the meeting, he said he does not think he could be clearer on his rate position, and exclaimed that when dissenting, it is best not to be a serial dissenter. There has been a range of views on the expected tariff impact; the doves like Waller expect a one-time price increase, but others suggest there could be a more permanent impact. Note, the majority of the Fed continues to echo that they will wait for the data and if inflation pressures pick up, they can hold for longer as long as the labor market remains robust. They also note they can cut quicker if needed if inflation falls faster than expected, or if there is an unexpected weakening in the labor market.
“There is no doubt that the FOMC will leave interest rates unchanged,” Bill Nelson, chief economist for the Bank Policy Institute, said Tuesday in a note. “The question is whether they will convey a greater openness to cutting rates at their September meeting,” Nelson, formerly a top economist at the central bank, said.
BEIGE BOOK: The Fed Beige Book, based on information collected on or before July 7, 2025, saw economic activity increase slightly from late May through early July. Five Districts reported slight or modest gains, five had flat activity, and the remaining two Districts noted modest declines in activity, an improvement from the prior report. Employment increased very slightly overall, with one District noting modest increases, six reporting slight increases, three no change, and two noting slight declines. Although reports of layoffs were limited in all industries, they were somewhat more common among manufacturers. Looking ahead, many contacts expected to postpone major hiring and layoff decisions until the uncertainty diminished. Prices increased across Districts, with seven characterizing price growth as moderate and five characterizing it as modest, mostly similar to the previous report. In all twelve Districts, businesses reported experiencing modest to pronounced input cost pressures related to tariffs, especially for raw materials used in manufacturing and construction. It also reported that many firms passed on at least a portion of cost increases to consumers through price hikes or surcharges, although some held off raising prices because of customers’ growing price sensitivity, resulting in compressed profit margins. Contacts in a wide range of industries expect cost pressures to remain elevated in the coming months, increasing the likelihood that consumer prices will start to rise more rapidly by late summer.
POWELL V TRUMP: Some of the Q&A will likely focus on US President Trump’s criticism of Powell, and his lack of willingness to lower rates, although after a meeting last week, Trump said he had the impression that Powell may be ready to lower rates. Given many on the Fed, including Powell, have signaled a wait-and-see approach, and a dedication to central bank independence, a July cut remains unlikely. Powell’s term as Chair is set to expire at the end of May 2026, but his term as a Fed Governor does not expire until February 2028, opening up the possibility of him remaining on. Some have argued it would be good for Fed independence if Powell were to remain on as a Governor, despite Fed Chairs traditionally stepping down once their term as Chair is up. Note, whenever Powell is questioned about the future of his role, he avoids the question and states he is focusing on the current job at hand. Leading candidates to replace Powell are said to include former Fed Governor Kevin Warsh (who recently heavily criticised the Fed, and argued that rates should be lower), Governor Waller, as well as White House Advisor Hasset and Treasury Secretary Bessent.
MARKET REACTION: Below we excerpt some ideas from around the Goldman trading desk
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