NEWS AND INSIGHTS | INSIGHTS

CIO Notebook: Fed Still on Hold, Timing of Cuts Remains Uncertain

July 31, 2025
Shannon Saccocia, CFA, Chief Investment Officer - Wealth

We believe that the Fed will likely cut rates in September and once more in 2025; we remain constructive on equities, particularly developed ex. U.S. and U.S. small and mid-cap stocks, as well as commodities.

As expected, the Federal Open Market Committee (“FOMC”) maintained the fed funds target rate at a range of 4.25% to 4.50% in yesterday’s meeting. However, much has changed, reflected by the 9-2 vote, since we last heard from the Committee. The meeting marks the first time since 1993 that there have been two dissenters – but the outcome was not entirely surprising given recent rhetoric from both Christopher Waller and Michelle Bowman. The statement, too, reflected a shift in tone. Coming on the heels of the initial release of Q2 2025 GDP, the Fed statement acknowledged that while “swings in net exports continue to affect the data, recent indicators suggest that the growth of economic activity moderated in the first half of the year.” As a reminder, the prior statement indicated that growth “has continued to expand at a solid pace.” In addition, while the prior statement cited uncertainty as “diminished,” this month’s statement instead pointed to still “elevated” uncertainty.

Both changes appeared to reflect a more dovish tilt coming into the press conference. However, in Federal Reserve Chair Jerome Powell’s remarks, he continued to reiterate that the job market is both “solid” and “in balance” based on a “wide set of indicators.” He stated that while there are “downside risks” in the labor market, there should instead be a keener focus on the unemployment rate, as the breakeven rate has come down in parallel with the decline in the labor force. As it relates to inflation, Powell admitted that while there has been little recent progress in the movement of PCE (the Fed’s preferred inflation gauge), the composition has changed. Service inflation has slowed, but he pointed to the influence of increased tariffs on the prices of certain goods. He did state that the Fed views the current upward movement as a one-time shift, but that the risk that the higher prices become persistent is one that the Fed “must manage.” In our view, it was this admission, which he built on later in the press conference, that turned the sentiment tide.

Outside of yesterday’s Fed decision, this week is a busy one. With the most recent delay deadline for reciprocal tariffs looming, announced deals with Japan and the European Union have shifted the pressure to Canada, Mexico, South Korea, Taiwan, Brazil, and India, with the latter two nations in President Trump’s crosshairs coming into this week. Even more confounding is the status of a further delay and/or negotiation with China, which at this point remains unclear. What is evident is that tariff revenues continued to roll in and Treasury Secretary Scott Bessent has indicated that it will be a “busy August” as tariff rates are expected to rise meaningfully for those countries without a deal.

There are also a number of key economic data releases to contend with. As mentioned above, the first release of Q2 2025 GDP reflected +3.0% year-over-year growth for the U.S. economy, compared with a decline of -0.5% in the first quarter of the year. As expected, imports fell sharply, down -30.3%, reversing the sharp increase from the first quarter. Consumer spending was up a modest +1.4%, with overall domestic demand up only +1.2%, while business equipment spending decelerated to +4.8% and residential investment posted a woeful -4.6% decline. Overall, the U.S. economy grew by only +1.2% in the first half of 2025, and with growth expected to accelerate only modestly in the second half, it is likely that 2025 will close well off 2025’s +2.8% pace. With that said, +3.0% was modestly better than expected and is helping to push the probability of a September rate cut lower in yesterday’s trading session. This may reverse come Friday, when we receive July’s U.S. non-farm payrolls report. While consensus is hovering around +118k, the range of potential outcomes is incredibly wide and could incite a strong move in both equity and bond markets.

In short, investors were disappointed with the hawkish tone struck by Chair Powell in the press conference and are bracing for another period of data watching ahead of the September meeting. August and September have been seasonally weak over the last several years, and yesterday’s decision would likely have put pressure on Powell outside of the political pall that is currently hanging over him. U.S. equities sold off, with small caps underperforming while the VIX index moved higher along with Treasury yields and the dollar. As for our views and positioning, we believe that the Fed will likely cut rates in September and once more before the end of 2025. We remain constructive on equities, particularly developed ex. U.S. and U.S. small and mid-cap stocks, as well as commodities. We believe any weakness following Q2 2025 earnings season could represent an opportunity to add to risk positions, and that a recession is not on the horizon, despite the more modest economic growth experienced in the first half of the year.

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