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The July 30 FOMC meeting was arguably the most exciting so far in 2025 – the meeting was, under the surface, far more exciting than the “no policy change” headline would imply. Notably, we got significant color on Chair Powell’s perspectives on inflation coupled with a growing divide among FOMC members, which saw 2 dissenting votes on the Committee for the first time since 1993. Yet similar to the federal funds rate, which was held steady at 4.25-4.50%, the underlying messaging from the Fed was largely unchanged. They see a solid labor market and elevated inflation, and in the context of their dual mandate, their goal of 2% inflation remains elusive. So, for now, the Fed remains on hold as they continue to assess the mounting risks surrounding labor and inflation amidst an uncertain economic outlook.
Uncertainty persists, and the path forward is still unclear
Uncertainty, by the Fed’s own admission, remains elevated. A notable change to the FOMC statement was the removal of “diminished” in the context of describing the uncertainty surrounding the economic outlook. That partly reflects the timing of the June and July meetings, which saw only one cycle of labor and inflation data in the interim. Fortunately, the September meeting will come on the back of two employment reports and two inflation reports, which should help to shed more light on their decision-making process. When pressed on what it would take for the Fed to be ready to cut, Powell responded with, “As the two targets get back into balance, you would think you would move it in a way closer to neutral and the next steps that we take are likely to be in that direction. What will it take?… it will be the totality of the evidence. As I mentioned, there’s quite a lot of data coming in which before the next meeting…so, we will have to see.”
Why does the Fed continue to wait?
Powell justified their decision to hold rates steady today in two ways. First, he talked about what we can observe now, which is an economy that is still generally healthy (i.e., what the labor data is telling us) along with stubborn inflation. Powell stated ”we think policy should be restrictive because inflation is above target. When we have risks to both goals, one of them is farther away from goal than the other and that’s inflation… That means policy should be tight because tight policy is what brings inflation down.” But what stood out the most is Powell’s assessment of inflation – even without tariffs, he views the path of inflation as “running a bit above 2%…even excluding tariff effects.” Interestingly, he went onto describe some of the catch-up inflation we are still seeing following the Covid supply-chain shock, namely auto insurance costs. In that light, we wonder if they expect to see a similar transmission of inflationary pressures in the insurance and broader services space as a result of tariff shocks. He also mentioned risk of added price pressures resulting from the cover of tariffs, specifically citing the rise in dryer prices despite washing machines being tariffed.
What we think the Fed will do
Following the recent string of positive labor market data, we recently pushed back our call for the Fed to begin cutting by 25bps at the December meeting. However as we highlighted here, there are upside risks to inflation and if those materialize, we see a risk that the Fed will need to continue to hold rates steady until such time that the tariff impacts subside, likely not until 2026. A notable inflation risk is a continuation of section 232 tariffs on top of country-specific tariffs could create a more persistent inflationary environment. And while we do see downside risks for the labor market if business margins come under pressure – the dual slowing of labor supply and demand should continue to keep a cap on the unemployment rate, meaning it will be harder for the Fed to cut solely on the labor side of their mandate.
About the Author
Mike Reid is a Senior U.S. Economist at RBC. He is responsible for generating RBC’s U.S. economic outlook, providing commentary on macro indicators, and producing written analysis around the economic backdrop.
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