July FOMC: Optionality maintained

Summary

• The FOMC left the federal funds rate unchanged for the fifth consecutive meeting. The post-meeting policy statement had minimal changes and continued to characterize inflation as "somewhat elevated," the unemployment rate as "low" and labor market conditions as "solid." The pace of balance sheet runoff, also known as quantitative tightening, was left unchanged.

• Governors Waller and Bowman dissented against the decision to hold rates steady, preferring instead to cut the fed funds rate by 25 bps. This marked the first time multiple governors formally dissented since December 1993.

• To some extent these dissents reflect political jockeying, as Jerome Powell's term as Chair comes to an end next spring. But, we suspect the dissents reflect at least some genuine disagreement among Committee participants as they grapple with the appropriate stance of monetary policy amid the stagflationary impulse from higher tariffs.

• In the post-meeting press conference, Chair Powell was very careful to play his cards close to the chest regarding the outlook for a rate cut at the September meeting. Chair Powell cited easing financial conditions, a low unemployment rate and still-above target inflation as reasons to keep rates on hold. But, he highlighted potential downside risks to the labor market as a key reason to remain nimble when thinking about the path forward for the fed funds rate.

• Economic and policy developments between now and the next FOMC meeting on September 16-17 will be critical to determining the path forward for monetary policy. The FOMC will receive two more employment reports (including Friday's jobs data) and two more months of inflation data between now and then. Furthermore, although we doubt full clarity on tariffs is coming anytime soon, we should know more about the administration's tariff intentions and the economy-wide average effective tariff rate come mid-September.

• As we go to print, markets are pricing roughly a 49% chance of a 25 bps rate cut at the September FOMC meeting. Our current forecast looks for the FOMC to cut the fed funds rate by 25 bps at its September, October and December meetings, with risks skewed toward pushing back the timing of those cuts. We intend to adjust our fed funds forecast, if necessary, after the dust has settled following Friday's employment report.

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