The Federal Reserve is likely to keep its benchmark interest rate between 4.25% and 4.50%. In the past, the Fed made rate cuts in September and November 2024, facing pushback from President Trump. The economy is changing, as tariffs have stopped disinflation, keeping headline inflation steady while prices for goods remain firm. Inflation in the service sector has eased, providing some balance. Chair Powell has noted that inflation risks are on the rise and wants to permanently eliminate inflation pressures. Without the impact of tariffs, a more supportive monetary policy might have been possible. Although he faces ongoing criticism, Powell is determined to avoid past mistakes and is focused on keeping inflation expectations stable despite political pressure.

Labor Market and Economic Indicators

While there are signs of weakness in the labor market, Powell believes the Fed is in a good position to pause and closely watch economic trends. Political pressure from President Trump continues, urging for rate cuts despite recent GDP growth. Some members of the Federal Open Market Committee (FOMC), like Bowman and Waller, are considering rate cuts, which could influence future expectations. Key elements of the upcoming meeting will include the tone of the statement, Powell’s press conference, and discussions around growth versus inflation. The market is cautiously predicting no rate cuts this year, reflecting Powell’s influence and potential divisions within the Committee. With the Federal Reserve expected to hold interest rates steady at 4.25%-4.50%, traders are focused on future signals rather than immediate actions. The market is tense, waiting to see if the Fed will hint at future rate cuts or maintain its stance against inflation. This situation suggests that volatility is likely in the weeks ahead. We need to consider the mixed data the Fed is analyzing. The latest Consumer Price Index (CPI) for July shows a year-over-year increase of 3.4%, indicating that the decrease in prices has stalled since the tariff announcements in early 2025. Additionally, a recent jobs report revealed an addition of 175,000 payrolls, slightly below expectations, confirming a slow cooling of the labor market.

Market Reactions and Future Trajectories

This data presents arguments for both sides of the FOMC. The strong 3.0% GDP growth from last quarter supports calls for rate cuts, suggesting the economy can handle them. However, Chair Powell is wary of reigniting inflation, especially after facing criticism for acting too slowly in 2021 and 2022. Given this uncertainty, a smart strategy is to use options for positioning ahead of the Fed’s clarifications. We are monitoring any indications that dissent among members like Bowman and Waller is increasing within the committee. A divided Fed could signal a weakening consensus on maintaining high rates, possibly speeding up the timeline for cuts. Currently, the market is anticipating the first rate cut in November or December, so any remarks reinforcing this timeline would be viewed as neutral. If Powell expresses concern about slowing growth, it could lead to rate cuts being pushed forward to September, causing a rally in bonds and stocks. However, if he emphasizes that the fight against inflation is not over, expectations for a cut in 2025 may disappear. Reflecting on the Fed’s slow reaction in 2021-22, Powell seems determined not to repeat that mistake. He appears prepared to tolerate a softer labor market if it helps eradicate inflation for good. Thus, traders should be ready for him to sound more hawkish than is currently expected. Create your live VT Markets account and start trading now.

here to set up a live account on VT Markets now