Macro Strategy: Fed Maintains Rates, Leaning Toward a Hawkish Narrative

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Macro Strategy

Fed Maintains Rates, Leaning Toward a Hawkish Narrative

As widely expected, the Fed kept rates at 4.25–4.5%, citing still-elevated inflation and a solid but softening labor market. Chair Powell signaled a cautious, data-dependent approach given the uncertainties about tariffs and their potential impact on inflation.

The decision to keep rates unchanged was not unanimous, as two members, Governor Chris Waller and Fed Vice Chair for Supervision Michelle Bowman, both considered potential candidates for the next Fed Chair, favored a cut. Most members, however, viewed the current policy stance as appropriately restrictive. A decision to cut rates may ultimately depend on the upcoming data ahead of the September meeting.

Following the more hawkish tone, markets adjusted with lower expectations for a September rate cut, higher Treasury yields, and the DXY briefly reaching 100. Looking closer, the 2Y UST yield rose by only 6 bps, which we view as a relatively small move, suggesting that market are already looking beyond 2026, when a potentially more dovish new Fed Chair may be more supportive of rate cuts.

Key Takeaways from July 25 FOMC:

September rate cut remains undecided, but the option is still open. Powell stated that the Fed will review two more rounds of inflation and jobs data before making a decision. For now, the current policy stance is considered “modestly restrictive” and appropriate.
Tariffs may distort inflation. Goods inflation is rising again, partly due to new tariffs. While Powell sees these as likely “one-time” price level shifts, he acknowledged the risk of broader pass-through effects. The Fed won’t overreact yet but stands ready if persistence shows.
Labor market is stable but losing steam. Job gains have slowed, and private hiring looks weaker, yet the unemployment rate remains low due to parallel declines in labor supply. The Fed sees this as balanced, at least for now, but flagged downside risks if demand weakens faster than expected.

The US 2Q25 data release also came in stronger than expected. GDP grew 3% in the 2Q25, exceeding the 2.3% estimate and rebounding from a 0.5% decline in 1Q25, indicating the US economy appears still resilient. Consumer spending also strengthened, rising 1.4% in 2Q25 compared to 1Q25’s 0.5%.

Data releases over the next two months will be closely watched for their potential impact on the September FOMC decision, with upcoming inflation readings playing a crucial role in shaping the Fed’s tone. The latest Beige Book noted that contacts across a broad range of industries expect cost pressures to remain elevated in the coming months, raising the likelihood that consumer prices could begin accelerating more rapidly by late summer.