Fed July Meeting Preview: Trade Deal Progress Undermines Hawkish Case — A Turning Point in Sight?

TradingKey - On Wednesday, July 30, the Federal Reserve will announce its latest FOMC rate decision. While no rate cut is expected, this could be the most contentious and pivotal meeting of 2025 so far, with growing signs that the central bank may be nearing a policy shift.

Market consensus expects the Fed to hold the federal funds rate steady at 4.25%–4.50% — marking the fifth consecutive meeting without a rate change in 2025. The last rate cut was a 25-basis-point reduction in December 2024.

Federal Reserve Interest Rate Decisions, Source: TradingKey

As of last Friday (July 25), CME FedWatch data showed:

• 96.9% probability of no rate cut in July
• ~60% chance of a September cut
• 42% probability of a second rate cut by December

Inflation Fears Fade — Trade Deal Progress Undermines Hawkish Case

The Fed has long balanced its dual mandate of price stability and maximum employment. Since President Donald Trump’s return, the biggest concern has been the inflationary impact of high tariffs, with Fed officials citing upside risks to inflation as justification for maintaining a restrictive stance.

In the June Summary of Economic Projections (SEP), the Fed raised its 2025 year-end inflation forecast from 2.7% to 3.0%, reflecting heightened price pressures.

But recent data tells a different story.

The June CPI report showed core inflation underperforming expectations for the fifth consecutive month, challenging the narrative that tariffs are driving a sustained inflation surge.

Many economists now argue that the tariff impact may be transitory — a one-time price adjustment rather than a persistent upward spiral. Christopher Waller, a key Fed policymaker who supports more rate cuts this year, said tariffs might raise prices temporarily but are unlikely to trigger a wage-price spiral.

Moreover, the U.S. has now reached tariff agreements with Japan and the EU, setting a 15% base rate — below the initial 20–24% rates announced on April 2. This progress reduces the risk of further escalation and suggests effective tariff rates may decline, easing inflationary pressure.

Labor Market Weakness Emerges as the New Focus

With inflation risks receding, attention is shifting to the labor market — now seen by many as the primary catalyst for rate cuts.

The July nonfarm payrolls report will be released shortly after the FOMC decision, and analysts believe it could be the main driver of shifts in rate expectations.

TD Securities noted that weakening employment trends could force the Fed to act, even if inflation remains sticky.

For Waller and Governor Michelle Bowman — the Fed’s two most vocal dovish voices — softening labor conditions strengthen their case for cutting rates.

Waller said the economy is still growing, but momentum has significantly slowed, and the risk to the Fed’s employment mandate is rising.

Bowman added that progress in trade talks has reduced economic uncertainty, but weaker consumer spending and job growth are now tilting risks toward the downside.

Meanwhile, other officials, including Adriana Kugler and Raphael Bostic, remain hawkish, arguing that price pressures still need to be confirmed before any easing begins.

Trump Visits the Fed — Pressure on Powell Intensifies

In a rare move, President Donald Trump personally visited Federal Reserve headquarters last week to meet with Chair Jerome Powell — the first time a sitting U.S. president has done so since 2006.

During the visit, Trump publicly urged Powell to cut rates immediately, underscoring his urgency. Such direct presidential pressure is highly unusual and seen as a challenge to the Fed’s independence.

Trump has cited multiple reasons for rate cuts:

• Lowering the U.S. government’s debt interest burden
• Concerns over Fed headquarters renovation costs
• Reviving the housing market
• Boosting economic growth ahead of the 2026 midterms

However, most analysts still believe the odds of Trump firing Powell are low — not just for legal and political reasons, but because of the market chaos it could trigger.

Deutsche Bank warned that while firing Powell might push short-term rates lower, it could cause 10-year and 30-year Treasury yields to spike by 20 and 45 basis points, respectively — sharply increasing borrowing costs for mortgages and businesses.

A High-Stakes Week for Markets

Last week, the S&P 500 rose for five consecutive days, hitting new all-time highs, driven by improving trade outlooks and solid Q2 earnings.

If the Fed signals a more dovish tone, it could solidify expectations of two rate cuts in 2025, reigniting the bull market in equities.

The U.S.-EU tariff deal has also boosted risk appetite, helping to mask lingering valuation concerns.

However, with four of the Magnificent 7 tech giants set to report earnings this week — including Apple, Microsoft, Amazon, and Meta — their results could dominate market sentiment and overshadow the Fed’s message.