It's Going to Be a Contentious Debate as Investors Look Forward to a Rate Cut in the Fall

Federal Reserve policymakers are set to keep interest rates unchanged for a bit longer, but this week’s policy meeting is expected to spark a more intense debate, potentially strengthening expectations for rate cuts in the fall. Chair Jerome Powell is under mounting political pressure from President Donald Trump and his allies to lower borrowing costs and may face dissenting votes from officials advocating for immediate action to support a cooling labor market.

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Despite this pressure, the Fed is widely anticipated to maintain its current benchmark rate when its two-day meeting concludes on July 30. Policymakers want more economic data before making any moves, particularly to assess how tariffs are impacting consumer prices.

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“While we don’t expect a policy rate change this week, there are signs we’re nearing a turning point in the Fed’s strategy,” said Sarah House, senior economist at Wells Fargo. “However, most officials remain cautious, awaiting clearer signals on inflation and tariff effects.”

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The Fed will release its policy statement on Wednesday at 2 p.m. Washington time, followed by Powell’s press conference half an hour later. Futures markets suggest investors are betting on a rate cut at the September meeting, making Powell’s remarks critical for shaping those expectations.

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The decision comes during a busy week of economic updates, including Friday’s employment report, which is forecast to show slower hiring in July as uncertainty around trade policies weighs on business sentiment.

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Potential Dissents

Some analysts expect dissenting votes from Fed Governor Christopher Waller and Vice Chair for Supervision Michelle Bowman, both Trump appointees who believe interest rates are too high given the growing risks to employment.

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Waller recently hinted that he might dissent, saying the Fed should act now to support a labor market that is “on the edge.” Bowman similarly stated in June that she could favor a rate cut this month if inflation remains subdued.

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If both officials vote against holding rates steady, it would mark the first time two governors dissented in the same decision since 1993. Waller is also rumored to be a candidate for replacing Powell when his term ends in May, raising speculation that his dissent could have political motivations. Michael Feroli, chief U.S. economist at JPMorgan Chase & Co., suggested that multiple dissents may be “more about positioning for the Fed chair role than reflecting current economic conditions.”

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According to Diane Swonk, chief economist at KPMG, dissent is not unusual during potential turning points in monetary policy. “We should expect divisions to emerge as the Fed approaches a decision on when to begin cutting rates,” she said, citing uncertainty over the full economic impact of tariffs.

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Inflation Concerns

While Waller and Bowman emphasize the employment mandate, most Fed officials remain focused on inflation risks. Policymakers are grappling with uncertainty over how tariffs will influence consumer prices. June’s projections showed a split within the committee: 10 of 19 officials anticipated at least two rate cuts this year, while seven foresaw none.

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Recent inflation data revealed price increases in tariff-affected goods such as toys and appliances. However, underlying inflation rose less than expected for the fifth straight month, suggesting that broad-based price pressures are not yet materializing.

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“Given the post-pandemic inflation patterns, some Fed officials are cautious, thinking tariffs might take longer to impact prices,” said John Briggs, head of U.S. rates strategy at Natixis North America. “The lack of immediate data clarity is delaying the Fed’s willingness to pivot.” Natixis forecasts that rate cuts will resume in October, continuing in quarter-point steps through mid-2026.

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Powell’s Challenge

During his press conference, Powell will likely face questions about tariffs, inflation, and political attacks on the Fed. He is expected to reiterate the central bank’s commitment to price stability, given that inflation still exceeds its 2% target. Powell may also acknowledge that stronger-than-expected economic data and recent trade agreements have reduced the risk of severe inflation, which could set the stage for a rate cut in September.

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By the next policy meeting on September 16-17, the Fed will have access to two more employment reports, along with fresh data on inflation, consumer spending, and housing. Andrzej Skiba of RBC Global Asset Management believes that unless tariffs escalate sharply or inflation unexpectedly spikes, officials may be ready to ease rates by then.

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Economists remain puzzled about why tariffs have not driven prices higher. Gregory Daco, chief economist for EY-Parthenon, suggested that companies might be mitigating costs through early inventory builds and supply chain adjustments. “Powell will likely highlight these dynamics, noting that cost pressures are emerging but maintaining a balanced message,” Daco said.

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Powell has endured significant political pressure from Trump this year, including direct threats to his position. Republican criticism of the central bank has recently intensified, focusing on its $2.5 billion building renovation project. Trump even toured the construction site last Thursday.

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Reporters are expected to question Powell about these attacks during Wednesday’s press conference. However, he is likely to stay focused on economic issues. Feroli noted that Powell’s prepared responses would include “ample material unrelated to monetary policy,” predicting that the Fed chair will emphasize his focus on the mandate set by Congress.

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Overall, while the Fed is unlikely to cut rates this week, the internal debate and upcoming data releases suggest the central bank is inching closer to an easing cycle, possibly beginning in September or October.

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