The Great Rate Debate

The Federal Reserve held its benchmark interest rate steady today, maintaining the target range at 4.25%–4.50%. Fed Chair Jerome Powell characterized current policy as “modestly restrictive,” citing a labor market that remains “solid” with “historically low unemployment.” With investors widely expecting no change to the target rate this month, perhaps the most notable shift from this meeting came from dissent within the committee. 

For the first time since 1993, two FOMC Governors dissented: Michelle Bowman and Christopher Waller voted in favor of a rate cut. While the double dissent is rare, it is not exactly a huge surprise given recent Fedspeak.

A Divided Committee

The June FOMC decision to hold rates steady was unanimous, but the minutes from that meeting (released on July 9, 2025) revealed growing divergence within the committee. Some participants were “open to considering a reduction in the target range for the policy rate as soon as at the next meeting,” provided the data evolved in line with their expectations. Others “saw the most likely appropriate path of monetary policy as involving no reductions in the target range for the federal funds rate this year,” pointing to persistent inflation above the Fed’s 2% goal, elevated short-term inflation expectations, and a resilient economy.

The June Summary of Economic Projections (SEP) reflected this internal tension. While the median dot still showed two rate cuts expected in 2025, the distribution of dots highlighted a wide dispersion in expectations.

Recent Fedspeak

Waller’s dissent today comes after his recent speech “The Case for Cutting Now,” in which he laid out his rationale for easing. Waller sees tariffs as one-off price increases, not persistent inflationary pressures: “Standard central banking practice is to 'look through' such price-level effects as long as inflation expectations are anchored, which they are.”

Waller also addressed recent labor market data (we discussed this in the last edition of Fed Watch). While headline numbers remain stable, Waller noted “once we account for expected data revisions, private-sector payroll growth is near stall speed, and other data suggest that the downside risks to the labor market have increased.”

Bowman echoed similar concerns in a speech on June 23rd: “With inflation on a sustained trajectory toward 2 percent, softness in aggregate demand, and signs of fragility in the labor market, I think that we should put more weight on downside risks to our employment mandate going forward.” 

The Hawkish Rebuttal

Powell leaned more cautious in his assessment. While he agreed that “A reasonable base case is that the effects on inflation could be short lived, reflecting a one-time shift in the price level,” he was careful to add that “it is also possible that the inflationary effects could instead be more persistent. And that is a risk to be assessed and managed." On the labor market, Powell struck a different tone than Waller: “The main number you have to look at now is the unemployment rate... demand for workers has come down but so has the break-even number. That puts the labor market in balance.” He did acknowledge that this balance is emerging from a decline in both supply and demand, which “is suggestive of downside risks.”

Governor Adriana Kugler struck a more hawkish tone last month, saying: “Economic weakness isn’t there to warrant a rate cut.” That line remains emblematic of a faction within the Fed that prefers to wait for the dust to settle before pulling the trigger on cuts.

Rising Uncertainty, Again

Another subtle but meaningful shift appeared in the FOMC statement language. In June, the Committee noted that “uncertainty about the economic outlook has diminished.” That line was removed in today’s statement, which instead reads: “uncertainty about the economic outlook remains elevated.”

CNBC’s Steve Liesman asked Powell about the change during today’s press conference. Powell downplayed it, saying: “At the time of the last meeting, uncertainty had moved down a little bit, but it was more or less even this time. So we took out ‘had diminished’ because it didn’t diminish further.”

While Powell insisted the change wasn’t meaningful, markets may see otherwise. Since the June meeting, the administration has inked several trade deals, arguably increasing visibility into tariff policy. Powell acknowledged progress, saying, “We are clearly getting more and more information,” but quickly added: “It doesn’t feel like we’re very close to the end of that process… there’s much more to come.”

Market Reaction

Markets initially shrugged at the policy hold but responded to Powell’s cautious tone. The S&P 500 ended the day down -0.12%, yields ending the day higher as the 2Y yield rose by 7bp and the 10Y rose by 5bp as futures markets decreased their odds of a September cut. Fed Funds Futures now imply a roughly 48% probability of a cut at the next meeting, down from 70% at the close on the previous day.

Powell vs. Trump 

Although President Trump has dialed back explicit threats to fire Chair Powell, pressure on the Fed remains high. Earlier this month, Trump publicly criticized the Fed’s renovation project and met with Powell on July 24 to tour the site. Despite the theatrics, markets largely ignored the meeting. The S&P 500 opened 0.09% higher the following day, suggesting investors are treating these skirmishes as political noise rather than meaningful threats to Fed independence.

Polymarket odds of Powell being removed by year-end currently sit at just 18%, reinforcing that view. 

Looking Ahead

The Fed’s next decision will come at the September 16–17 meeting. By then, investors and policymakers will have two more employment reports and two additional PCE inflation prints, including this Thursday’s PCE and Friday’s Jobs Report. Fed Watchers eager for an update before then have Powell’s speech at the Jackson Hole Symposium in August to look forward to. 

Patience remains the dominant theme, but the risk calculus arguably is evolving.