FOMC Commentary – July 30, 2025

July 30, 2025 – The Federal Open Market Committee (FOMC) Interest Rate Meeting concluded with a decision to leave the Fed Funds Target Range at 4.25%-4.5%.  This decision was widely expected, as were the dissenting votes of Fed Governors Chris Waller and Michelle Bowman, both of whom voted for a quarter-point interest rate cut.  
 
However, the FOMC statement started in a surprising place, by referencing a moderation of economic activity in the first half of the year.  On a day when second-quarter US GDP growth was reported out (first estimate) at a robust 3%, one would not immediately think in terms of referencing slower economic activity as a precursor for leaving rates unchanged. 
 
Chairman Powell’s opening remarks in his press conference were more interesting than usual, revealing a focus on first half 2025 data in comparison to second half 2024 data, as opposed to second quarter data in comparison to first quarter data. It was made clear that this perspective was adopted as a way to “look through” the swings in data (imports, consumer spending, inventories) caused by the trade upheaval of the second quarter. Thus, the 3% second quarter GDP estimate released Wednesday morning was less significant than the fact that first half GDP growth averaged 1.6% in comparison to 2.5% second half 2024 economic growth. Rather surprisingly, Chairman Powell did not mention the slower, 1.2% Final Sales to Private Domestic Purchasers (“PFDP”) figure for the second quarter of 2025; this subject would be referenced by several reporters later in the press conference.
  
In the summary of economic conditions with which Chairman Powell always introduces the press conference, he placed considerable emphasis on “balanced” labor market data and did not seem to wish to emphasize the “moderation of economic activity” language of the FOMC statement.  Chairman Powell cited the 150,000 jobs per month created over the last three months and the 2.5% inflation rate for the last 12 months (with services inflation easing and goods inflation rising) as clearly supporting the current monetary policy stance. Justification of an acknowledged, “moderately restrictive” monetary policy via the combination of 1) a labor market that is “in balance”, 2) a low and constant unemployment rate, and 3) an inflation rate that remains above target, became the dominant theme of the press conference.  This would seem to be a direct retort to recent comments from Fed President Mary Daly, though not necessarily from policy dissenters Bowman and Waller. 
 
Chairman Powell handled the elephants in the room — President Trump’s views on interest rates and the dissenting opinions of Fed Governors Bowman and Waller — with considerable aplomb. Several times, he referenced the thoughtfulness of the FOMC debate of various viewpoints and indicated that he thought this meeting was an “especially good one.” He managed to downplay any potential controversy within the FOMC itself by referencing a shared dedication to careful, thoughtful discussion of the economic risks, and he thanked President Trump for his guidance on the much-in-the-news Federal Reserve building construction.  
 
With so much hanging on inflation– the implication being that if inflation was persistently at the target 2% a rate cut would be more possible, even probable– many of the press conference questions were understandably directed at the impact of tariffs.  Chairman Powell continued to state what everyone already knows, i.e., that this is a data-driven Federal Reserve and the data is still insufficient to indicate the actual impact of tariffs on inflation rates.  When asked what the Fed had learned from the first few months of tariff impositions, Chairman Powell replied that the major lesson was probably that “the process is going to be slower” in terms of the economy absorbing the effects of tariffs in various ways.  Acknowledging that it appeared that consumers were not yet paying most of the costs of tariffs, he chose to also mention that producers and retailers are indicating their intention to start passing those cost increases along.  This caution was leavened several times by the somewhat astounding statement that ” there is a pretty reasonable base case” that the tariffs will have a one-time effect.  Although Chairman Powell has said in past press conferences that tariffs “might” raise the price level but not change the inflation rate, he has not explicitly stated before that such a view represents the “base case.”  This price level argument is one that has been advanced by Governor Waller for several months.  
 
The press conference was, in total, a more cohesive and comprehensive defense of current Federal Reserve monetary policy — and, specifically, the decision to leave interest rates unchanged– than past press conferences.  In the usual recitation of the Federal Reserve’s dual mandate to ensure price stability and full employment, there was a certain steeliness that no doubt had to be understood against the backdrop of controversies and headlines.  A remarkable moment developed after one question about tariffs and inflation: (in paraphrase) There will not be an inflation problem, said Chairman Powell, because there is no question, in the end, about what we will do . . . We will reach our inflation targets,” and the goal is to do this efficiently” by neither waiting too long to cut interest rates and causing the economy to slow excessively nor by moving rates down too soon and risking a reemergence of inflation that must be aggressively attacked.  
 
There was little about the extremely short FOMC statement or the press conference that could be described as explicit positioning of the next rate cut in a manner that could be interpreted as addressing “concerns” in the White House.  It was a surprisingly confident and determined  Chairman Powell today.  One who nevertheless seemed quite happy to get off the press conference podium.

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