Powell Under Pressure: What to Expect from the July Fed Meeting

Key Takeaways

• The Federal Reserve is likely to hold interest rates steady at its July meeting, with Trump’s tariffs beginning to put upward pressure on inflation.
• Powell is facing intensifying pressure to cut rates, alongside threats to his position from the Trump administration.
• Markets expect a full percentage point of cuts by the end of 2026.

It feels like everybody wants lower interest rates: President Donald Trump, the Treasury secretary, and even members of the Federal Open Market Committee. But with inflation above target (and potentially moving in the wrong direction, thanks to tariffs) and the economy cooling but still solid, analysts say central bankers still have time to wait. The Federal Reserve is widely expected to hold rates steady for a fifth consecutive meeting.

“[Federal Reserve Chair Jerome] Powell’s aim at the press conference will be to sound quite boring and balanced, and that’s partly because we’re going to learn quite a lot in the next couple of months,” says Simon Dangoor, head of fixed income macro strategies at Goldman Sachs Asset Management. By the time they meet again in September, Fed officials will have several more months of inflation and payroll data under their belts.

Inflation data from June showed prices rising in trade-sensitive categories like apparel and appliances—an early sign that Trump’s new tariffs are beginning to affect the economy. “The big question is whether we’ll see more of that,” says Josh Hirt, senior economist at Vanguard. “And even if we do see more of that, is it a onetime increase?”

While the Fed is widely expected to vote to keep rates unchanged and Powell is expected to avoid creating headlines, there is one potential opening for what passes for drama out of the central bank: dissenting votes on the decision. Disagreement over the nature of tariff-induced inflation, temporary or not, means analysts will be watching for a rare departure from consensus.

Pressure on Powell to Cut Rates

The Fed chair has been subject to a barrage of criticism from the White House this year, since Trump believes interest rates are too high. That criticism reached a crescendo this month amid news reports suggesting that Trump was close to firing Powell outright. Such a move would likely raise alarm bells and roil financial markets. Trump has since changed his tune, but the onslaught has continued. “This is more pressure than normal for the Fed Chair,” says Hirt.

Powell is faced with a delicate balancing act. He has kept interest rates steady since December despite a chorus of demands from Washington that he lower them. He has reiterated that the Fed’s decisions will depend on economic data, so far indicates an economy expanding at a solid pace, according to the FOMC’s June statement. Powell has also emphasized the political independence of the central bank.

Threats to that independence could have dire consequences, including “upside risks to an inflation outlook that is already subject to upward pressures from tariffs and somewhat elevated inflation expectations,” wrote JP Morgan chief US economist Michael Feroli last week. He also cited the potential for higher long-term interest rates, a slower outlook for economic activity, and a worsening fiscal position.

FOMC Divisions

Complicating the picture is a vocal contingent within the FOMC that’s in favor of an immediate rate cut. “The risks to the economy are weighted toward cutting sooner rather than later,” Fed Governor Christopher Waller said in prepared remarks last week. “If the slowing of economic and employment growth were to accelerate and warrant moving toward a more neutral setting more quickly, then waiting until September or even later in the year would risk us falling behind the curve.”

Waller expects the inflationary boost from tariffs will be short-lived, and has said that policy is too far from neutral, given a solid labor market and data on inflation excluding the effects of tariffs. He says risks to the labor market have increased.

Some analysts expect Waller to cast a dissenting vote when the FOMC meets next week. That would be a rare departure; in recent years, the FOMC has generally been able reach a consensus on policy decisions. The most recent dissent, from Governor Michelle Bowman in September 2024, was the first by a board member in two decades. Regional Fed presidents have cast dissenting votes more frequently.

Who Will Powell’s Successor Be?

Waller is one of several contenders to succeed Powell when his term ends in May 2026, though the White House has said it is not in a rush to announce its nominee. Other possible contenders include former Fed Governor Kevin Warsh, National Economic Council Director Kevin Hassett, and Treasury Secretary Scott Bessent. “There seems to be a preference amongst the administration for a group of people that tend to lean more dovish,” says Dangoor of Goldman Sachs.

Regardless of when or how the transition happens, market watchers are also looking ahead to a more accommodative Fed. Bond futures traders are pricing in a full percentage point of rate cuts between now and December 2026, according to the CME FedWatch tool.

Dangoor doesn’t expect new leadership to bring about a sea change in how the Fed operates, given its existing dovish bent. “The Fed that comes out the other side will be more similar to, but not necessarily identical to, the current Fed we’re dealing with, [rather than] wildly different,” he says.

Labor Market in Focus

While inflation continues to make headlines, analysts will be paying close attention to signs of stress in the labor market over the next few months. “If the labor market were to start softening, it [makes] the Fed’s job more difficult,” says Vanguard’s Hirt. A weak labor market calls for accommodative monetary policy in the form of lower rates, but inflation above the target calls for policy that remains more restrictive.

Dangoor thinks the unemployment rate reaching 4.5% by the end of the year (up from 4.1% in June) would likely prompt a September cut. Hirt says the threshold for what the Fed might consider “material weakening” is closer to 4.7% or 4.8%.

When Will the Fed Cut Rates?

Dangoor says that right now, he isn’t seeing signs that financial markets are worried that the Fed is behind the curve on rate cuts. “If anything, you’ve had a period of more stability.”

Against that backdrop, bond futures traders see a 95% chance that the Fed leaves rates steady at its meeting next week. They see roughly 60% odds of a rate cut in September, according to the CME FedWatch tool.

Many analysts expect the Fed to cut more regularly in 2026 as it moves toward a neutral stance where rates are neither accommodative nor restrictive. Vanguard’s Hirt anticipates 1 percentage point of cuts between now and the end of 2026. “The Fed is still restrictive,” he says, and “they would like to get policy a little bit closer to neutral.”