An under-fire Fed to keep rates on hold at July meeting, despite political pressure to cut immediately

We expect the US Federal Reserve to keep rates on hold once again at the 30th July meeting, leaving the Fed funds target range unchanged at 4.25%-4.50% for the fifth consecutive meeting.

• The growth and inflation backdrop supports a patient Fed policy approach, but pressure is growing to cut rates, both from the Trump administration and from members on the Fed board.
• Since the last Fed meeting in June, consumer demand has continued to wane as tariff-induced inflation pressures show signs of building. However, easier financial conditions have helped to alleviate some downside growth risks.
• We think the Fed can be in wait-and-see mode in July as it continues to assess the impact of tariffs on economic activity and inflation. Short term interest rate markets tend to agree, with little expectation of a July rate cut.
• Looking beyond July, however, the market is pricing barely two rate cuts by year-end. We think that much will hinge on the inflation prints over the coming weeks, but going into the September Fed meeting, the political pressure to cut rates may well have risen considerably, especially if consumer demand and the labour market softens more than expected.
• From a strategy perspective, we think the current macro and policy environment favours US yield curve steepeners. In currency markets, we think the US dollar is facing structural headwinds, supporting our conviction to short the US dollar versus a basket of currencies.

The first six months of the Trump administration have certainly been eventful for policymakers, bringing with it policy shocks and uncertainty. Growth and inflation expectations for 2025 have gyrated, with the consensus currently settling at a sub-trend growth year of 1.5%[1] and CPI inflation ending the year at 3.4% - a stagflationary macro environment. Recent US macro data have highlighted the challenges facing the Fed. Consumer confidence has taken a knock, with consumer spending on import-intensive goods struggling on the back of the tariff measures. Housing activity has also seen a sharp slowdown. However, the labour market has been more resilient than expected. The unemployment rate has held steady for much of this year, even as the broad picture is one of modestly slowing labour market activity and frozen hiring intentions.

On the inflation front, meanwhile, the Fed’s preferred inflation gauge - core PCE inflation - is still sitting at an above-target 2.7% y/y and there are signs that tariffs are beginning to leak into core goods inflation. Consumers’ inflation expectations have come off their multi-decade highs, but remain sufficiently high for the Fed to be reluctant to cut rates in July.

On the policy front, Fed Chair Powell has been facing increasing political pressure to cut rates immediately, with President Trump also dangling the threat of replacing Powell before his term expires in May 2026. Meanwhile, the minutes from the June Fed meeting noted that most participants regard policy as “well positioned” as they await more clarity on the growth and inflation outlook, whilst also noting the risk that tariffs could have more persistent effects on inflation. However, a few cracks are beginning to emerge from within the Fed on the current policy stance. In recent weeks, Fed Governor Waller called for a 25bp cut in July given his belief that: tariffs will only bring a one-time boost to the price level; the economy has already been operating below-potential in the first half of this year; and there are increasing downside risks to the labour market. Other Fed participants, however, have signalled a desire to not lower rates pre-emptively, with Powell himself suggesting that it remains prudent to wait and see how things take shape on the macro front.

We think the data supports a Fed on hold in July, but absent a significant upside surprise in the upcoming inflation data, September could be a “live” meeting for a resumption of rate cuts, especially if economic activity data and possibly overwhelming political pressure force the Fed’s hand.

We think this macro and policy landscape continues to favour US yield curve steepeners, with the passage of the “One Big Beautiful Bill” underscoring the longer-term fiscal challenges facing the US economy. In an environment where upside inflation risks cannot be discounted and concerns grow about future Fed independence, we also favour an exposure to US TIPS at the 5 and 10-year part of the curve. In FX, we maintain a bearish view on the US dollar owing to the structural imbalances facing the US economy.

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[1]All date sources : Bloomberg, 23/07/2025