INSTANT VIEW-FOMC holds rates steady, but two dissenters wanted cuts

July 30 (Reuters) - The Federal Reserve held interest rates steady on Wednesday in a split decision that gave little indication of when borrowing costs might be lowered and drew dissents from two of the U.S. central bank's governors, both appointees of President Donald Trump who agree with him that monetary policy is too tight.

The Federal Open Market Committee voted 9-2 to keep its benchmark overnight interest rate steady in the 4.25%-4.50% range for the fifth consecutive meeting.

The policy statement did note that economic growth "moderated in the first half of the year," possibly bolstering the case to lower rates at a future meeting should that trend continue. But it also said that "uncertainty about the economic outlook remains elevated."

This week's meeting marks the first time in more than 30 years that two members of the Fed's seven-person Washington-based Board of Governors, Vice Chair for Supervision Michelle Bowman and Governor Christopher Waller, voted against a rate decision at the consensus-driven central bank. Waller has been mentioned as a possible nominee to replace Fed Chair Jerome Powell when his term expires next May.

MARKET REACTION:

STOCKS: The S&P 500 .SPX pared a slight gain to +0.19%

BONDS: The yield on benchmark U.S. 10-year notes US10YT=RR ticked a bit lower but was still up 2.4 bp on the day at 4.352%FOREX: The dollar index =USD gained and was last up 0.55%

COMMENTS:

NATHAN THOOFT, CHIEF INVESTMENT OFFICER AND SENIOR PORTFOLIO MANAGER AT MANULIFE INVESTMENT MANAGEMENT:

"This is kind of a nothing burger to an extent because it was widely expected that they wouldn't change rates. It was also pretty widely expected we'd have at least one, if not a couple, dissenters, which we did end up getting. I don't think it changes the path for the Fed, but I do think, given that there's two vocal dissenters now, we're going to move in the direction of the dissenters and we're probably going to get one or two quarter point cuts by the end of this year, which is our base case to still get two cuts in 2025 -- a total of 50 basis points. And the market seemed to have been priced correctly as well because we're seeing very little movement in equities or fixed at this stage, or the dollar."

JP POWERS, CIO, RWA WEALTH PARTNERS, BOSTON:

"He's going to probably navigate things pretty deftly here in the press conference. But those two dissents, even though they're forecasted, that's still a pretty big deal. He's going to have a job to do to keep this committee together until the term ends next year. But the market reaction coming out as expected, I would probably look ahead to some real news at the Jackson Hole meeting next month, unless he does make some news during this press conference. I'd be kind of surprised if he does.

"But there wasn't too much of a change in the statement here, still showing concerns about how these tariff policies will come through. And probably yet to rely on the data that's come through, you can see that just in the GDP report, how much noise is going on in each of these releases right now. If I was Powell, I don't know how much he thinks about his legacy, but I think he's going to err on the side of probably being too late to cut rates here on his way out rather than risk any flare-up just as he's heading off into the sunset."

RON PICCININI, HEAD OF INVESTMENT RESEARCH, AMPLIFY, SCOTTSDALE, ARIZONA:

“Futures markets were indicating a near 98% likelihood of the central bank holding steady, so this decision comes as no surprise.

“This does not change our allocation discipline, and we continue to optimize our strategic holdings for a neutral interest rate probability distribution, until clear intentions are communicated either downward or upward.”

ADAM SARHAN, CHIEF EXECUTIVE, 50 PARK INVESTMENTS, NEW YORK

"So they met expectations with no change in rates, but it's the first time in a long time that the Fed is divided. Trump wants aggressive cuts. The Fed did not cut but left the door open for cuts and we had some members dissent. Of course, we have the 2:30 press conference where (Fed Chair Jerome Powell) will probably lean a little toward the side of cutting rates.

"But cutting rates today would have been an expectation breaker... The Fed's dual mandate is to keep unemployment low - you can check that box - and to keep inflation near 2%, and right now inflation is above 2%. So, forget the Trump pressure. Look at if the Fed is doing its job and the answer is, yes, it's doing its job. The Fed cutting right now based on the data wouldn't be warranted."

MATTHIAS SCHEIBER, HEAD OF THE MULTI-ASSET TEAM, ALLSPRING GLOBAL INVESTMENTS, LONDON:

"U.S. fiscal policy has remained loose, and passage of the One Big Beautiful Bill Act looks to be adding fuel to the fire. The act is estimated to contribute up to 1% to U.S. economic growth in its first year, with the marginal contribution decreasing over time. At the headline level, the U.S. economy appears robust: Unemployment remains stable, real earnings continue to grow, and corporate earnings have proven resilient."

"Barring a major labor market shock or renewed concerns over Fed independence, we expect the central bank to maintain a 'wait and see' stance with possibly one rate cut later this year. Much will depend on how the trade-off between inflation and growth evolves. If growth weakens further, the Fed may be inclined to cut rates to support the economy. However, if growth remains resilient, it will be difficult to justify easing with inflation still elevated."

TONY WELCH, CHIEF INVESTMENT OFFICER, SIGNATUREFD, ATLANTA:

"It was broadly as expected. You had rates remaining unchanged and they cited disparate things in the data in terms of and pushes and pulls on inflation and a bit of moderation in economic activity. At least they are now noting that there has been some moderation so that's a little bit of a change. And you had a couple of dissents, which was broadly expected as well. That explains why you're not seeing a lot of movement in the market right now because there's nothing that's surprising."

BRIAN JACOBSEN, CHIEF ECONOMIST, ANNEX WEALTH MANAGEMENT, MENOMONEE FALLS, WISCONSIN:

"The last time there was a double-dissent was September 2020. There is the clear and present danger of slower growth while the risk of inflation is more speculative and likely a one-off event even if it does happen. Tariffs don’t have to hit consumer prices if businesses are absorbing the cost. That dynamic leads to slower growth, not higher consumer price inflation.

"The Fed probably wishes it waited until next Wednesday to have this meeting so they could have the employment numbers to look at. It’s setting up to be an awful lot like last year when, in hindsight, they wished they’d have cut in July and so they did a catchup-cut in September."

TOM GRAFF, CHIEF INVESTMENT OFFICER, FACET, PHOENIX, MARYLAND:

“As expected, the Fed took no formal action at today’s meeting. However, the Fed is clearly in a tricky position. The Fed logically expects some amount of inflation to stem from newly implemented tariffs. Ideally, they would wait until after inflation peaks to consider cutting.

“However, the pressure is building. Even if the White House weren’t applying external pressure, the recent softness in the labor market has the Fed worried. Indeed, this is presumably why Christopher Waller and Michelle Bowman dissented this meeting, preferring to cut rates.

“I believe this sets up the Fed to cut at the September meeting, and probably 1-2 times more before year-end. It may be a tricky communications job, cutting rates even though prices will probably be rising. The communications challenge is made worse by Trump’s cajoling over rates. It may look like Powell is caving to Trump’s demands. But if job growth continues to flag, a recession becomes more and more likely. Powell won’t be able to ignore that for too much longer.”

CHRISTOPHER HODGE, CHIEF US ECONOMIST, NATIXIS , NEW YORK:

“The dissents were notable, but well-previewed and do not represent a broader fracturing on the committee. If a third vote went along with Bowman and Waller, that would have been significant. I actually don't think there is much disagreement on the economics between Waller and the rest of the FOMC. All would agree that tariffs won’t pass through one for one and that their effect is likely to be transitory. The disagreement is political - Waller assumes certainty on trade policy sooner rather than later and the majority looks at the now six month rolling threats of tariffs and aren't so sure about that”