Fed to avoid clear signal on rate-cut timing

Business Times

30-07-2025

[NEW YORK] Investors parsing Jerome Powell's remarks on Wednesday (Jul 30) for any hint that the US Federal Reserve is moving closer to an interest-rate cut might be left wanting.
Policymakers are largely expected to hold interest rates steady for a fifth consecutive meeting at the conclusion of their Jul 29 to 30 gathering. Dissents from one or more officials could send the message that some members of the rate-setting Federal Open Market Committee (FOMC) prefer to reduce borrowing costs sooner rather than later.
But with an onslaught of economic data due before their next meeting in September, the Fed chair may opt to leave his options open until there's more clarity about the direction of the economy and the right path for policy.
'There is no doubt that the FOMC will leave interest rates unchanged,' Bill Nelson, chief economist for the Bank Policy Institute (BPI), said on 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.
US President Donald Trump has not ceased his calls for rate cuts. And Powell will surely field questions about the central bank's US$2.5 billion building renovation, which has become a target for Republicans attacking the Fed.
The Fed's rate decision will be released at 2 pm in Washington on Wednesday, and Powell will hold a post-meeting press conference 30 minutes later.
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September outlook
After this week, the Fed will hold only three more policy meetings this year. In June, Fed officials signalled their intention to deliver two quarter-point rate cuts in 2025, based on their median projection. That makes a reduction in September seem likely, said Veronica Clark, an economist at Citigroup.
'The average official is still in this wait-and-see mode, but September is very reasonable,' said Clark.
But it's still an open question how much Powell will move expectations in that direction, said BPI's Nelson. Investors are already putting the probability of a rate cut in September at more than 60 per cent, according to pricing in federal funds futures contracts.
Fed officials might not want those odds to move higher before they have had a chance to review the economic data coming before the meeting, Nelson said.
Policymakers will see two more jobs reports, including the July report due on Friday, before they gather on Sep 16 to 17. They will also get additional data on inflation, spending and housing.
'If the committee wants to keep its options open, it will have to be studiously neutral and continue to emphasise data-dependence,' Nelson said.
Dissenting votes
If the Fed chooses to maintain its characterisation of the labour market as 'solid' in its post-meeting statement, it could elicit dissenting votes from officials who are worried that the US employment landscape is looking more fragile.
Fed governor Christopher Waller laid out his argument for a July rate cut in a detailed speech earlier this month, expressing concern about a labour market 'on the edge' that could deteriorate rapidly if the Fed does not offer more support. Another governor, Fed vice-chair for supervision Michelle Bowman, has also expressed a readiness to lower rates as soon as this meeting.
If both Waller and Bowman dissent, it would be the first time since 1993 that two governors voted against a policy decision. While notable, some Fed watchers say it's normal to have disagreement among officials when policy is nearing a turning point.
Tariff impact
Powell is likely to face questions about his reading of the latest inflation data. The Fed chief and other officials have expressed cautiousness about lowering rates until they better understand the impact of tariffs on prices. Trump's Aug 1 deadline for trade deals could provide some additional clarity on where the average tariff rate will settle, and by extension, the economic outlook.
Waller has said he expects tariffs to lead to a one-time price bump, while other officials are worried the hit to inflation could prove more persistent.
Prices of some goods have risen, but many economists are puzzled as to why the effects have not been more pronounced. The impact may be delayed by businesses front-loading imports of inventories, absorbing the blow through lower profit margins and, at least for now, sharing some of the burden of tariffs with others across the supply chain, said Gregory Daco, chief economist for EY-Parthenon.
Political pressure
There's no shortage of additional topics that could come up in the press conference, including the Fed's renovation project, and the tour given to Trump and other Republicans last week. Powell may be peppered with questions about whether political pressure is affecting officials' ability to make policy decisions.
Powell may also be asked to respond to a proposal from Treasury Secretary Scott Bessent that the central bank conduct a review of non-monetary policy functions to address what he called 'mission creep'.
'An internal review would be a good start,' Bessent said on Jul 23. 'And if the internal review didn't look like it was serious, then maybe there could be an external review.' BLOOMBERG