Stay Grounded as Fed Holds Steady Amid Growing Division

As largely expected, the Federal Reserve held interest rates steady in the 4.25%–4.50% range during today’s decision. Two governors — Waller and Bowman — dissented, in favor of a 25 bp cut. This is the first decision with two dissenting votes since 1993.

This dissent reveals more division among Fed officials on the path for interest rates going forward. In the June meeting summary of economic projections two distinct camps emerged, with roughly half of members expecting 0–25 bps of cuts this year and half expecting 50–75 bps. Attention now turns to the September meeting. As of writing, the market is pricing in a roughly 45% probability of a 25 bp cut at that time.

Despite the division and political pressure to cut rates, recent data has shifted most Fed officials’ attention toward the inflation side of their dual mandate. While inflation has come down, it remains stubbornly above the Fed’s 2% target rate. The other side of the dual mandate — maximum employment — is in seemingly better balance, with a roughly even number of job seekers and job openings reported in June. Arguments for a rate cut focus on preventing any deterioration in labor market conditions.

ITR Economics maintains its outlook that inflation will likely rebound in the second half of 2025 and into 2026. While attention is focused on the inflationary impacts of recent tariffs, our analysis suggests that it will take between 9 and 18 months for tariff-related inflation to become evident in economic data. Fundamental inflation will be much more broadly driven by recent monetary and fiscal policy decisions, labor cost pressures, electricity costs, housing costs, and nascent commodity price escalation.

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On the employment side, conditions are loosening slightly but are doing so from a historically tight starting point. Demographic trends suggest that the size of the labor force won’t be able to keep up with the demand for labor. Those who want a job are likely to have one in the coming years.

Taken together, these pressures will likely limit the Federal Reserve’s ability to cut rates significantly in the latter half of this year. The possibility remains that we will see modest rate decline, perhaps 25 or even 50 bps. However, a cut of this magnitude would not significantly move the needle on economic growth; currently it is in a slowing growth trend at a slightly below average pace.

For individuals and businesses, today’s rate decision should serve as a reminder that fundamentals matter more than attention-grabbing headline items. Instead of waiting for lower rates that may or may not come to fruition, decision makers should assess opportunities for their fundamental merits. It is always appealing to wait to buy that house or finance that new equipment when the cost of capital is at its lowest. But timing the low of the rate cycle is a challenging game. Playing it and trying to time the low risks missing the right opportunity for the sake of a mere 25 or so basis points.