Fed Holds Rates Steady; Eyes Turn to September

by Kathy Jones of Charles Schwab, 8/1/25

As expected, the Federal Reserve made no change in policy at the July meeting of the Federal Open Market Committee (FOMC). The target range for the federal funds rate—the rate that banks charge each other for overnight loans—was left unchanged at 4.25% to 4.5%, where it has been since December 2024.

There were two dissenting votes however—one from Fed Governor Christopher Waller and one from Fed Governor Michelle Bowman. Both favored a rate cut at the July meeting. Although dissents have not been common in recent years, the majority of the committee still voted to hold steady for now.

Balance-of-risks focus is still on inflation for now

Despite the unchanged policy, the Fed appeared to open the door for a potential rate cut later in the year. The statement accompanying the Fed's meeting continued to characterize the labor market as "solid" but the assessment of the economy's growth rate was downgraded to "moderate" compared to "a solid pace." The description of inflation remained unchanged at "somewhat elevated."

We continue to believe that there will be enough evidence to support a decision to ease policy by the September meeting. By then, we expect to see further moderation in economic growth and enough weakness in the labor market to warrant a rate cut. The pace of consumer spending has already slowed, growing just 1.4% in the second quarter and averaging just 1.0% year to date. Real final sales to domestic purchasers—a reading that strips out the volatility of trade and inventories—grew at a sluggish 1.2% in the most recent quarter.

The pace of consumer spending has slowed
Pace of consumer spending graph

However, we don't look for a rapid decline in rates, as inflation is likely to remain above the Fed's 2% target until next year due to the impact of tariffs, which are pushing prices for imported goods higher. In his press conference following the meeting, Fed Chair Jerome Powell noted that tariff price increases were just beginning to show up, and that inflation readings likely would move higher in the near term. The committee was hopeful that those price increases will prove "short-lived" but they wanted to ensure that they don't produce a longer-turn rise in inflation or inflation expectations.