• Again, no change in rates: Fed Funds range is 4.25% to 4.5%.
• Economic activity is “moderated.”
•  Uncertainty “remains elevated.”
• Two voters dissented.

No surprise

For a fifth consecutive meeting, the Federal Open Market Committee did not change short-term rates.

Tariffs continue to be front of mind for the Committee. They resurrected a line from prior meetings: “Uncertainty about the economic outlook remains elevated.” Statements about labor conditions remaining solid and inflation remaining “somewhat elevated” were repeated from the past two meetings. Overall, no surprises from the press release or Chair Powell’s press conference. 

Background

Today’s advance report on the second quarter’s GDP growth came in at 3%. The headline number was well above estimates, but the Fed wisely looked past the headline. The 3% headline looks impressive but was skewed higher by a collapse in imports. Remember in the first quarter, imports subtracted from GDP as companies raced to bring in goods before tariffs took effect. Beneath the headlines the Fed could see that activity decreased last quarter. Averaging the two quarters together, the economy grew about 1.2% in the first half of the year after inflation effects are removed. So, growth continues to moderate, but not enough to prod the Fed to cut rates.

Usually, FOMC votes on interest rate changes are unanimous. We are fairly certain that the Chair “counts noses” before going in. That said, members Waller and Bowman have made plenty of noises in recent speeches about cutting rates. Their argument centers around the 4.25% lower bound rate being at least 1.25% above inflation. They view this level as a restrictive policy. History says that difference ranges as high as 2.5%, and the economy has done just fine.

You will see news outlets pushing the headline, “two dissents, first time since 1993.” While true, it is not a signal of deep fissures. Dissents usually occur when a Chair becomes a lame duck. Powell’s term is up next May and Trump certainly will not reappoint him. The dissents are more about staking out future positions under a new Chair than serious policy disagreements. 

Powell presser

Repeating his remarks from the June press conference, Chairman Powell stressed he wants to be able to respond to tariff inflation. And “there should be no doubt that we will do what we need to do to keep inflation under control.” A direct reading of that statement implies that if inflation rises, he will push the Committee to raise rates. Wall Street will push the narrative that Powell is fighting Trump with that statement because Trump wants lower rates. He reiterated that the Fed is looking at (trailing) 12-month inflation.  

Powell also pointed to the unemployment rate as a key decision point for rate moves later this year. Payroll growth may have slowed, but so has the supply of new workers. Powell said that this leaves the labor market “in balance.” This Friday’s preliminary June jobs report should show a gain of around 110,000 jobs and unemployment rate steady at 4%. 

Summary

The next FOMC meeting concludes September 17. Powell will speak at the Kansas City Fed’s Jackson Hole symposium in late August, updating the Fed’s policy direction. Once the policy direction is known, then markets will position for a rate change, likely for another quarter-point cut at some point in the fall.

We still think markets and economies will adapt to the tariff landscape and resume growth in the fall. In that case, no cuts are needed by the Fed, and that remains our base case. In the meantime, the economy will continue to grind forward in first gear, waiting on “final” tariffs.

Please let us know how we can help you.

Steve Orr is the Managing Director and Chief Investment Officer for Texas Capital Bank Private Wealth Advisors. Steve has earned the right to use the Chartered Financial Analyst and Chartered Market Technician designations. He holds a Bachelor of Arts in Economics from The University of Texas at Austin, a Master of Business Administration in Finance from Texas State University, and a Juris Doctor in Securities from St. Mary’s University School of Law. Follow him on Twitter here. 

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