Fed Rates Unchanged AGAIN: Why Powell May Cut Rates In H2 Despite Tariffs Pushing Inflation Higher?

The US Federal Reserve has maintained key fund interest rates at 1/4 to 4-1/2 percent for the fifth time in a row. FOMC chief Jerome Powell also signaled no rate cut possibility in the September 2025 policy. However, while deciding the policy outcomes, there were two dissenting votes, both in favor of a rate cut in the July meeting. Experts also believe that the Fed will most likely have to cut rates later of the year.

To achieve maximum employment and inflation at the rate of 2% over the longer run, the Fed decided to maintain the target range for the federal funds rate at 4-1/4 to 4-1/2 percent.

FOMC said, "Although swings in net exports continue to affect the data, recent indicators suggest that growth of economic activity moderated in the first half of the year. The unemployment rate remains low, and labor market conditions remain solid. Inflation remains somewhat elevated."

Among the votes, Jerome H. Powell, Chair; John C. Williams, Vice Chair; Michael S. Barr; Susan M. Collins; Lisa D. Cook; Austan D. Goolsbee; Philip N. Jefferson; Alberto G. Musalem; and Jeffrey R. Schmid voted for maintaining status quo in rates. However, Michelle W. Bowman and Christopher J. Waller voted against the status quo and preferred to lower the target range for the federal funds rate by 1/4 percentage point at this meeting.

"There were two dissenting votes however-one from Fed Governor Christopher Waller and one from Fed Governor Michelle Bowman. Both favoured a rate cut at the July meeting. Although dissents have not been common in recent years, the majority of the committee still voted to hold steady for now," said Kathy Jones, Chief Fixed Income Strategist at Charles Schwab.

She added, "Despite the unchanged policy, the Fed appeared to open the door for a potential rate cut later in the year. The statement accompanying the Fed's meeting continued to characterize the labor market as "solid" but the assessment of the economy's growth rate was downgraded to "moderate" compared to "a solid pace." The description of inflation remained unchanged at "somewhat elevated."

The analyst continues to that there will be enough evidence to support a decision to ease policy by the September meeting.

By then, she added, "We expect to see further moderation in economic growth and enough weakness in the labour market to warrant a rate cut. The pace of consumer spending has already slowed, growing just 1.4% in the second quarter and averaging just 1.0% year to date. Real final sales to domestic purchasers-a reading that strips out the volatility of trade and inventories-grew at a sluggish 1.2% in the most recent quarter."

However, the strategist does not look for a rapid decline in rates, as inflation is likely to remain above the Fed's 2% target until next year due to the impact of tariffs, which are pushing prices for imported goods higher.

Another setback could be the new tariffs imposed by US President Donald Trump from August 1st onward.

Trump has announced a new blow on global trade deals with a 25% tariff rate on all imports from India, while countries like Mexico, Canada, Iraq, and Algeria are set to face much higher tariffs ranging from 30% to 35%.

After the 90-day window ended on July 9, many countries made tariff resolutions with Trump, which lowered US tariffs on the exported and imported goods. Countries like the EU, South Korea, Japan, the Philippines, Indonesia, Vietnam and UK will tariff rate of 10% to 20%.

These new tariffs will come into effect from August 1, 2025.

During the press conference on July 30, Powell pointed out that the impact of the hike in tariff prices were just beginning to show up, and accordingly, the FOMC is expecting inflation to move higher in the near term. Powell also mentioned that the FOMC is hopeful that the impact of tariffs will be "short-lived," but they still are cautious to ensure tariffs don't put longer-term pressure in inflation or inflation expectations.

Charles Schwab strategist added, "The unemployment rate has remained low because there haven't been widespread layoffs, but the trends suggest a softening tone. If that continues, we would expect the Fed to respond with a rate cut even if the inflation readings remain above target. The assumption would be that slower growth will pull inflation lower longer term."

Accordingly, the strategist said, given the potential for inflation to be above the 2% target for quite some time, the Fed will likely take a cautious approach to cutting rates and the ending rate may be higher in this cycle than previously estimated. A terminal rate of 3% to 3.5% might be the low for this cycle, similar to the median longer-run projection of 3.0% from the Fed's last Summary of Economic Projections.