July flashlight for the FOMC blackout period – Declaration of independence

Summary

We expect the FOMC to hold the fed funds rate steady at 4.25%-4.50% for a fifth consecutive meeting at the conclusion of its upcoming gathering on July 30. Data over the inter-meeting period suggest the labor market remains roughly at "full employment," while inflation has edged up slightly and continues to run higher than the FOMC's 2% target. As such, most members are likely to support policy remaining "modestly" or "moderately" restrictive at this time.

That said, a split has emerged on the Committee about how to balance current risks to the outlook and the near-term path of rates. Some Committee members, most notably Governors Waller and Bowman, see risks to the labor market over-shadowing risks to inflation and appear supportive of a rate cut at the upcoming meeting. But, the majority of the Committee seems reluctant to resume rate cuts given the lingering upside risks to inflation generated by higher tariffs, relatively easy financial conditions and resilient economic activity.

With the July jobs report and a number of key trade deadlines falling shortly after the July FOMC meeting concludes, we do not expect the Committee to signal easing is forthcoming at its next meeting on September 16-17. Rather, we expect to see fairly minimal changes to the post-meeting statement to help the Committee preserve optionality about future policy decisions.

Public pressure from the Trump administration for the FOMC to lower rates and discussions of replacing Chair Powell have intensified since the Committee's last meeting, putting the question of the central bank's independence in the spotlight. The Federal Reserve has never been fully separate from the political process, but a combination of laws, agreements and norms permit a significant amount of independence when it comes to setting monetary policy. Will policy setting stay independent in the months ahead?

Our expectation is that Chair Powell will serve out the remainder of his current term, which expires in May 2026. The next Chair will likely lead the central bank in a more dovish direction, but we expect changes will be gradual rather than a complete departure from recent convention. The Committee is comprised of a mix of 12 voting members from the Board of Governors and regional Federal Reserve Banks, and decisions are made by consensus. One person, even the Chair, can only change monetary policy so far and so fast.

An overly-dovish bias of the next Fed Chair could prove counterproductive to the administration's aims. If the FOMC were to lose its inflation-fighting credibility, less foreign demand for U.S. assets, higher inflation expectations and a steeper yield curve strike us as plausible outcomes. In our view, moderate long-term interest rates are predicated on a credible, independent Federal Reserve and well-anchored inflation expectations.

Most Committee members already seem inclined to cut rates this year, as illustrated in the June Summary of Economic Projections and recent Fed speak. We expect the resumption of policy easing this autumn to alleviate some of the current political pressure on the Committee in the months ahead.

Download The Full Special Commentary