US - The Fed’s resistance is crumbling
Fed governers’ claims to be able to ease by July are likely politically motivated. Still, with pressure mounting, FOMC members increasingly signal openness to a September cut. The risk of easing too soon remains, with little sign of inflation, while economic slowdown visible.
President Trump is not happy with the Fed keeping rates on hold ever since he’s been in office. Still, his administration’s policies are the primary reason the Fed is hesitant to further ease rates. While suggests the Fed could consider lowering rates, Chair Powell in his press conference that the uncertainty around the economic outlook, particularly the impact of tariffs, is the primary reason they remain in wait-and-see mode. Removing Powell from office remains unlikely, but Trump recently revived the idea of a Shadow Chair, with Bessent suggesting to appoint the successor to the Fed board spot that opens up in January, rather than explicitly as chair in May of 2026.
Since the June meeting, more FOMC members have revealed their views on the policy path. The most striking statements come from Christopher Waller and Michelle Bowman, who both called for a rate cut as early as this month. We think these statements are largely political. Waller is a fringe contender for the chair position and Bowman has been named vice-chair by the President. These statements are dangerous nonetheless, playing into the White House narrative at a time when the attack on Fed independence calls for a united front. Other members have been milder, expressing the need for more data to gain confidence that tariffs won’t raise inflation in a persistent way. Some state that their base case is that this will lead to a September cut, while others say it could lead to a cut as early as September but are less committed. Powell himself moved from awaiting data ‘over the next year’ to data in ‘June, July and August,’ for rate decisions.
The summer will be instrumental. By the July meeting there will be a single extra CPI report, and possibly clarity on the pause on the liberation day package, which officially expires on 9 July. What rate path would be reasonable given ? Using a set of technical policy rules – by no means a definitive reaction function – we generate policy responses to the forecasts of inflation and unemployment in the latest Summary of Economic Projections (SEP). We take the median and a range based on the most hawkish (highest inflation, lowest unemployment) and most dovish response (lowest inflation, highest unemployment). The median forecast implies a single cut could happen this year, with another two in 2026. The range shows this single cut is the most supported by the current outlook, with the most hawkish scenario even calling for a rate hike. More rate cuts would require a drastic change in expectations on tariff-induced inflation. Our own forecasts imply a slightly more hawkish path than the median SEP, with our actual Fed forecast again marginally more hawkish on the back of the risk of inflation expectations de-anchoring.
Current market pricing is far outside the range implied by the SEP, and we’ve argued before that it is . The conclusion that it seems to assume a significant deterioration in the labour market without inflationary pressures still holds. The chart on the right shows market pricing for the fed funds rate on June and December 2025, along with our view. Following various tariff announcements, we shifted from a dovish to a hawkish view in February, with no more rate cuts. For June, this ultimately proved right. For December, market pricing has since diverged but also come back a bit again. Two rate cuts can be priced in or out in the span of a week. We continue to expect no rate cuts this year, but we judge the risk to our projected path errs on the side of more easing. Not on the back of less inflationary pressure (see also the ), but rather on signs of a slowdown that is broadening, with e.g. personal spending falling even without tariffs boosting prices, and a slowly deteriorating labour market. Alternatively, the Fed might ease because of in response to a variety of potential triggers, such as the passing of the Big Beautiful Bill, possibly combined with the trillions of T-Bill issuance around the same time.