Will The Fed Lower Interest Rates In July? Policymakers Are Split, FOMC Minutes Show

Will the Federal Reserve bring Christmas in July for borrowers? That depends on which of two factions prevails when the central bank’s policy committee meets at the end of the month.

The minutes of the Federal Open Market Committee’s June meeting, released Wednesday, show growing disagreement over whether the Fed should adjust its influential fed funds rate at its July 30 meeting.

On one side are those who believe inflation is tame enough to justify cutting rates, and on the other are members who are more worried that tariffs could drive up prices for consumers, potentially dealing a setback to the Fed’s mission to drive inflation down to its goal of a 2% annual rate.

The newly published meeting minutes highlighted a divide already evident from Fed officials’ public speeches. The officials are split about how they expect the economy to respond to President Donald Trump’s ongoing and sometimes unpredictable campaign of cranking up import taxes on numerous products and trading partners.

The federal funds rate influences borrowing costs on all kinds of loans, and bringing it down could boost the economy, but possibly at the risk of reigniting the high inflation that has plagued U.S. consumers since the late days of the pandemic.

Fed officials have also said they’re concerned about the possibility of tariffs dragging down the economy and hurting the job market. Congress has tasked the Fed with keeping employment high and fighting inflation.

To Cut Or Not To Cut?

Some fed officials were more concerned about possible tariff-driven inflation than others, according to the minutes.

“Most participants assessed that some reduction in the target range for the federal funds rate this year would likely be appropriate, noting that upward pressure on inflation from tariffs may be temporary or modest,” the minutes said. “A couple of participants noted that, if the data evolve in line with their expectations, they would be open to considering a reduction in the target range for the policy rate as soon as at the next meeting.”

But with inflation still running hotter than the Fed would like, some FOMC members stayed more hawkish.

“Some participants saw the most likely appropriate path of monetary policy as involving no reductions in the target range for the federal funds rate this year, noting that recent inflation readings had continued to exceed the Committee’s 2% goal.”

Consumer prices as measured by “core PCE” (the Fed’s preferred inflation benchmark) increased 2.7% over 12 months when last measured in May. The measure was headed in the wrong direction, moving away from the Fed’s 2% goal. Meanwhile, the job market has stayed resilient, according to official reports on payrolls, potentially buying more time for the Fed to keep rates steady and see what happens.

With only “a couple” of the committee’s 12 voting members favoring a July cut, financial markets continued to price in the likelihood the Fed won’t cut rates at least until September, according to the CME Group’s FedWatch tool. The tool forecasts rate movements based on fed funds futures trading data.

“The FOMC is comfortable remaining in wait-and-see mode,” Jeffrey Roach, Chief Economist for LPL Financial, wrote in a commentary. “Despite headwinds, the economy continues to trudge along, giving policymakers time to assess the projected impact from tariffs. Ever since last week’s payroll release, markets do not expect the FOMC will cut rates later this month.”