The Federal Open Market Committee (FOMC) voted to keep the federal funds rate target range unchanged at 4.25% – 4.50%. There were two dissents by Governors Waller and Bowman in favor of cutting rates 25 basis points (bps) at this meeting. This is the first time two governors have dissented a decision since 1993. 

Changes to the FOMC Statement: 

• The Federal Reserve (Fed) downgraded its assessment of economic growth to reflect slowing real consumer spending while reiterating that uncertainty about the economic outlook remains elevated. 
• The Fed maintained their assessment of the labor market as solid and inflation as somewhat elevated. 
• The Statement maintained its existing forward guidance. The FOMC is prepared to adjust the stance of policy as necessary and continues to monitor risks to both sides of its mandate. 

Key Quotes from Chair’s Press Conference:

• Current and Expected Policy Stance:
  • “Today we decided to leave our policy rate where it's been, which I would characterize as modestly restrictive. Inflation is running a bit above 2%...even excluding tariff effects. The labor market is solid, financial conditions are accommodative, and the economy is not performing as if restrictive policy is holding it back inappropriately…. It seems to me and to almost the whole committee that modestly restrictive policy seems appropriate. All that said, there's also downside risk to at the labor market. In coming months, we will receive a good amount of data that will help inform our assessment of the balance of risks and the appropriate setting of the federal funds rate.”
• Balance of Risks to Labor Market:
  • “If you look at the labor market, what you see is by many, many statistics, the labor market is kind of still in balance. It's things like quits, you know, job openings, and let alone the unemployment rate, they are all very, by many, measures, very similar to the way they were a year ago. So, you do not see weakening in the labor market. You do see a slowing in job creation but also a slowing in the supply of workers. So, you have got labor market that's in balance, albeit partially because both demand and supply for workers is coming down at the same pace and that's why the unemployment rate has remained roughly stable, which is why I said we do see downside risk in the labor market.”
• Balance of Risks to Inflation and Inflation Expectations:
  • “A reasonable base case is that the effects on inflation could be short lived. Reflecting a one-time shift in the price level. But it is also possible that the inflationary effects could instead be more persistent, and that is a risk to be assessed and managed.”
  • “We are seeing now is substantial amounts of tariff revenue being collected on the order of 30 billion a month, which is, substantially higher than before…it's starting to show up in consumer prices, as you know, in the June report, we expect to see more of that. And we know from surveys that companies feel that they have every intention of putting this through to the consumer. But, the truth is, they may not be able to in many cases. We are going to have to watch and learn empirically how much of this and over what period of time. We have learned is that the process will probably be slower than expected at the beginning…. we think we have a long way to go to really understand exactly how we will be.”

Our View: 

• The Federal Reserve (Fed) is in the process of assessing inflation under the new tariff regime and has taken a patient approach so far given the lack of clear evidence that the labor market is weakening in an alarming way. The labor market continues to slow at a nonthreatening pace and is still generally in balance. While the June CPI report came in softer than expected, there was evidence of core goods inflation from tariffs, and we expect there to be more tariff passthrough in the subsequent inflation data. We also expect the Fed to look through tariff related goods inflation given the broader evidence of disinflationary trends in services, shelter, and wages. 
• Despite downside risks to the U.S. economy remaining elevated, we retain our base case of sub-trend growth. The U.S. economy has proven resilient so far in this cycle and corporate balance sheet fundamentals suggest businesses have a strong starting point to manage higher costs. Nevertheless, we do expect job growth and economic activity to moderate and the Fed to respond with further rate cuts later this year. 
• We maintain our trading range for the ten-year U.S. Treasury (UST) yield at 3.75% - 4.50%. With the central bank keeping an easing bias, coupled with a balanced labor market, ongoing wage moderation, and continued service disinflation, this should limit the extent in which yields rise significantly even with goods inflation expected to continue to increase in the coming months due to tariffs. The threshold for the Fed to shift from an easing bias to a hiking one remains high. Should the labor market begin to weaken substantially and prompt the Fed to consider larger and faster rate cuts, we expect the ten-year U.S. Treasury yield to move into the lower end of this range. 

Forecasts, projections and other forward-looking statements are based upon current beliefs and expectations. They are for illustrative purposes only and serve as an indication of what may occur. Given the inherent uncertainties and risks associated with forecasts, projections and other forward statements, actual events, results or performance may differ materially from those reflected or contemplated.

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