What’s Fed Chair Jerome Powell’s next move on rate cuts?

Federal Reserve Chairman Jerome Powell was given a gift over the last few days with a surge in government employment in the jobs report, and then news on the trade war provided him with some cover for his stance on delaying rate cuts. What does this mean for the next Fed meeting and the rate outlook for 2025?

Even if the jobs report showed zero government jobs created, the Fed would not have cut rates. Additionally, we have a new timely variable, as the trade war deadline for deals, which was initially scheduled for July 9, has been moved to Aug. 1, a date after the Fed meets this month. As we can see below, the last labor report was helped by a sector that President Trump doesn’t want to see grow: government workers. Trump threatened to fire Powell earlier this year if he didn’t cut rates, and then called last week for Powell to resign.

My perspective has always been that the labor market needs to weaken significantly for the Federal Reserve to truly pivot, or for bond yields to decline enough to bring mortgage rates below 6%. Currently, the labor market is showing signs of softening, but it hasn’t yet truly broken. Now, we have more trade war news, and the bond market is not pleased with the trade war at all.

Trade deal deadline extended

Over the weekend, Trump postponed the deadline for tariffs from July 9 to Aug. 1 and sent letters outlining new tariff percentages for various countries. As a result, the stock market closed lower on Monday while the yield on the 10-year Treasury note rose by a few basis points.

One notable aspect of the trade war and the market reaction this year is that the bond market is not fond of the trade war, meaning that bond yields have made sharp upward moves, which in turn have taken mortgage rates higher. You can see why this happens because the Fed has told everyone they cannot be dovish with the trade war ongoing.

Recently, Powell mentioned that if there were no tariffs, the Federal Reserve would likely have already cut the Fed funds rate. Both the Fed and the markets are anticipating two rate cuts in 2025, even in the presence of tariffs.

However, Powell and other Fed presidents have indicated that if trade deals are reached, they could adopt a more dovish tone in their language regarding rate cuts. This means that July will be crucial. If trade deals can be finalized quickly, it might lead to a more dovish stance by the Fed at the end of July. However, if nothing significant occurs before Aug. 1, expect the Fed to maintain its current message, emphasizing the need for patience, as it believes the economy is not yet breaking.

Inflation is a wild card for the second half of 2025

Recently, the growth rate of inflation data has been relatively calm. This has posed some difficulty for the Fed, as it had raised its inflation expectations at the beginning of the year. So far, however, their anticipated rise in inflation has not materialized. Even some Fed presidents have noted that tariff inflation hasn’t yet been reflected in the data lines.

However, this doesn’t matter, as the Fed said they believe it’s coming, so it’s a race against time. They need to see the inflation data pick up over the next six months to warrant holding back on cutting rates. The only way this will change is if jobless claims data starts to break higher, which it hasn’t yet.

Conclusion

It seems unlikely that the Fed will cut rates in July, unless there is a significant rise in jobless claims data over the next few weeks. However, suppose the CPI and PPI inflation data come in lower than expected, and we manage to finalize some substantial trade deals at reasonable rates. In that case, we might at least expect a dovish tone from Chair Powell and the Fed by the end of July.

The opposite would be if inflation prints get hotter, labor data doesn’t get softer, and the trade war shifts into another negative gear — then all bets are off the table, and we might see a hawkish tone at the next Fed meeting.

Buckle up, folks, July could have some drama this year.