No Cut, No Clarity: Fed Stays Put in July

At its July 31st meeting, the Federal Reserve left interest rates unchanged at 4.25%–4.5%, but something unusual happened: two Fed governors—Christopher Waller and Michelle Bowman, both Trump appointees—broke ranks and voted for an immediate rate cut. It’s the first time in over 30 years that two FOMC members have simultaneously dissented in favor of easing.

In its statement, the Fed acknowledged that economic growth has "moderated," though it continued to describe the labor market as “strong” and inflation as “slightly above target.” The central bank also warned that the economic outlook remains “highly uncertain.” This mixed messaging reflects a growing dilemma for policymakers: on one hand, tariffs could keep inflation elevated, arguing for staying higher for longer; on the other, job market softness and slower growth are fueling calls for looser policy.

Source: Fed Funds Interest Rate, trading economics

Markets are now pricing in the possibility of a rate cut in September, with perhaps one more by year-end. But Powell didn’t confirm any timeline—in fact, he kept the door open, saying future moves depend on the data, especially how tariffs play out. So for now, the path to rate cuts remains unclear. That said, if job data keeps weakening, the Fed may be forced to act—and turning policy around at that point could be much tougher.

At his press conference, Powell was deliberately cautious. He didn’t commit to a cut in September but didn’t rule one out either. That ambiguity underscores the Fed’s current challenge: economic data is sending mixed signals, and policymakers aren’t yet sure if the U.S. economy is sliding into a slowdown or proving more resilient than expected.

The U.S. Economy: Resilient on the Surface, Fragile Underneath

Look closer at the economic data and you’ll see a tale of two Americas. The Fed’s updated language—from “solid expansion” to “moderated growth”—hints at this. On one hand, Q2 GDP rose 3.0%, beating expectations and showing solid momentum. But that strength may be misleading. A lot of it was driven by businesses front-loading imports ahead of new Trump-era tariffs, distorting the data.

Imports dropped 23% from March through June, reversing Q1’s pre-tariff surge and dragging overall trade flows lower. Meanwhile, exports dipped only slightly (–2.5%), which made net exports the biggest driver of GDP growth. But strip out all the trade noise, and underlying demand looks shaky: consumer spending grew just 1.4%—the slowest pace since the pandemic—and private domestic final sales (a cleaner measure of core demand) rose just 1.2%, their weakest showing since 2022. Business investment also slowed noticeably.

GDP of 2nd Quarter 2025 (Advance Estimate)

Jobs and Inflation: Two-Sided Risks

The labor market is giving off conflicting signals too. The 4.1% jobless rate looks fine on the surface, but labor force participation remains low, suggesting many workers have dropped out altogether. Wage growth is flatlining, and leading indicators like the Philly Fed employment index are pointing down—hints that the job market could be nearing a turning point.

Inflation, meanwhile, is also tough to read. Headline CPI in June ticked up slightly, but not alarmingly. Core PCE—the Fed’s favorite gauge—rose 2.6% year-over-year, still above the 2% target. The twist: tariff-driven goods prices are rising fast, while services inflation is cooling. That split is making it harder for the Fed to judge inflation trends or decide when to pivot.

The Fed’s Trilemma: Growth, Credibility, and Politics

The Fed now faces a triple challenge:

1. Growth is slowing, and the lagging effects of past rate hikes could still hit harder.

2. Inflation is still above target, so pivoting too early risks credibility.

3. Political pressure is rising, with Trump repeatedly urging the Fed to cut—testing the central bank’s independence.

Looking ahead, the Fed has three possible paths:

• The base case is staying patient and holding steady for a while.

• If jobs data worsens, the Fed could cut as early as September.

• If inflation heats back up, the Fed may be forced to keep rates high longer.

After Powell’s press conference, markets dialed back expectations. Fed funds futures now see just a 45% chance of a September cut, down from 68% before the meeting.

Markets Snapshot

• U.S. Dollar$BETASHARES US DOLLAR ETF(USD.AU)$ : The DXY index surged 1% intraday to a high of 99.86, then faced resistance around the key 100 level. Caution advised for chasing further upside. EUR/USD Fell more than 1%, bottoming near 1.14.

Source: TradingView

• Gold : Dropped $50 on the day, hitting $3,268/oz as the dollar surged. As long as it holds $3,250, the broader range of $3,250–$3,440 remains intact. A firm break below would signal bearish momentum.

• Bitcoin$iShares Bitcoin Trust ETF(IBIT)$ : Dipped slightly but held firm above the $115K–$116K support zone. Bias remains bullish above that level, with $120K acting as heavy resistance.

Despite initial declines during Powell’s remarks, the Nasdaq $NASDAQ(.IXIC)$ and S&P 500 $S&P 500(.SPX)$ rebounded sharply as corporate earnings rolled in. Microsoft $Microsoft(MSFT)$ and Meta $Meta Platforms, Inc.(META)$ both reported strong revenue beats, easing fears about tariff-related headwinds and reaffirming that U.S. tech growth remains robust. There’s no convincing reason right now to turn bearish on the Nasdaq or S&P 500.

Invesight Viewpoint

This Fed meeting marks a turning point in U.S. monetary policy. With trade dynamics shifting and election-season pressure rising, the path forward won’t be simple. The Fed is juggling growth, inflation, and political independence all at once. Whatever comes next, investors will need to stay nimble and prepare for multiple outcomes. The fog isn’t lifting anytime soon.