Fed Holds Rates Steady — Again

For the eighth straight meeting, the Federal Reserve held interest rates steady at a target range of 4.25% to 4.50%. That’s where they’ve been since December — a holding pattern driven by stable inflation, a resilient labor market, and a central bank that doesn’t want to get caught flat-footed by external shocks. But this time, two Fed governors dissented, calling for a rate cut instead. It was the first multi-governor dissent since 1993 — and a sign that internal consensus is fraying.

Markets had already priced in today’s outcome. According to CME’s FedWatch tool, traders gave a nearly 98% chance of there being no change going into this week’s meeting. But the bigger question now shifts to what comes next, as the odds of a September cut have climbed above 60%.

That growing optimism is partially fueled by new signals from Fed Chair Jerome Powell. After months of insisting inflation wasn’t quite where he wanted it, Powell has started to open the door: If price growth remains tame and the job market softens, the Fed may act as soon as this summer. Especially since tariffs are seeming less inflationary than originally feared, the bar for cuts has dropped slightly. 

While Q2’s headline GDP number looked strong — 3% annualized growth — the underlying story wasn’t quite as rosy. Private domestic demand grew at just 1.2%, the slowest pace in over two years, and rate-sensitive sectors like housing and commercial construction shrank again. As one economist put it, “the economy is growing well below the long-term trend” — and elevated interest rates may be the reason. Still, Powell is facing more than just economic data these days. President Trump has ramped up his criticism of the Fed, calling for drastic rate cuts to stimulate growth — sometimes suggesting rates should drop by 300 basis points (3%), which would bring them down to pre-pandemic levels. And with two governors now voting to cut rates early (both of whom were appointed by Trump), political pressure on the Fed is becoming harder to ignore. 

However, rushing to slash rates too soon could backfire. Experts warn that if the Fed is perceived as bowing to political pressure, long-term bond yields could actually rise — a counterproductive move that would increase borrowing costs and erode trust in the Fed’s independence. A similar episode occurred under Nixon in the 1970s, when pre-election rate cuts helped trigger double-digit inflation and a long-lasting credibility crisis for the central bank. 

The next meeting is in mid-September. Between now and then, you can expect the data (and the drama) to drive what happens next.

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