Federal Reserve officials Christopher Waller and Michelle Bowman disagreed with the recent decision to keep interest rates steady, suggesting a cut of 25 basis points. Waller believes the effects of tariffs are only temporary and highlights the need to keep inflation expectations stable. Waller thinks the policy should be nearly neutral rather than restrictive, arguing that keeping rates unchanged could hurt the labor market. Bowman warns that delaying action might worsen job market conditions and slow down economic growth. She supports a gradual shift towards a neutral interest rate to protect employment and meet dual-mandate goals.

Employment Risks

Both officials respect their colleagues’ views but stress the need to take employment risks seriously. They are committed to working together to ensure appropriate monetary policy. Their disagreement reflects their consistent belief leading up to the latest Federal Open Market Committee meeting, with Waller being particularly vocal about the need to cut rates. Waller and Bowman’s dissent indicates a growing divide within the Federal Reserve. While the majority voted to keep rates unchanged, these two members are advocating for a cut now, raising the chances of a policy change at the next meeting in September. Recent data supports their view. The July 2025 jobs report shows payrolls increased by only 155,000, falling short of expectations and marking the third consecutive month of slowing growth. Additionally, the unemployment rate rose to 4.1%, a figure not seen since late 2023.

Market Implications

For traders in interest rate derivatives, this suggests a higher chance of a September rate cut. SOFR futures contracts are expected to see increased buying activity as the market anticipates lower borrowing costs sooner than anticipated. The dissent from Waller and Bowman signals a move toward a more accommodating Federal Reserve policy. This division creates uncertainty, which may increase market volatility. Options traders might look for strategies that benefit from larger price swings, as the VIX has risen from near 12 earlier this year to over 16. The tension between a weakening job market and the cautious majority at the Fed makes significant price movements in either direction more likely. This scenario mirrors events from mid-2019 when the Fed faced internal pressure to cut rates due to slowing global growth, which they eventually did. History shows that when influential voices advocate for cuts and data weakens, a policy shift often follows. The potential for lower U.S. rates could also weaken the U.S. dollar. Traders in currency derivatives may seek to position themselves for a weaker dollar against other major currencies. The dissent among Fed officials makes it harder for the dollar to strengthen, as interest rate differentials are likely to move against it. Create your live VT Markets account and start trading now.

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