Fed holds interest rates, points to slowing economic activity

Federal Reserve officials left interest rates unchanged but downgraded their view of the US economy, a sign policymakers could be edging closer to lowering borrowing costs.

“Although swings in net exports continue to affect the data, recent indicators suggest that growth of economic activity moderated in the first half of the year,” officials said in a post-meeting statement. The Fed had previously characterized growth as expanding “at a solid pace.”

The Federal Open Market Committee voted 9-2 on Wednesday to hold the benchmark federal funds rate in a range of 4.25%-4.5%, as they have at each of their meetings this year. Governors Christopher Waller and Michelle Bowman voted against the decision in favor of a quarter-point cut.

Treasury yields pared gains while the S&P 500 and dollar remained higher after the decision.

Most policymakers have argued the Fed should hold off from rate cuts to gauge the impact of tariffs on inflation. Several have also emphasized that the strong labor market has allowed them to remain patient.

The committee’s decision to hold steady once again defies the intense pressure from President Donald Trump to cut rates. Moments before the decision, Trump predicted the Fed would lower rates in September and criticized the central bank again for not moving more quickly.

Fed Chair Jerome Powell will hold a press conference at 2:30 p.m. in Washington.

Follow the reaction in real time on Bloomberg’s TOPLive blog

In their statement, central bank officials repeated the view that the labor market is “solid” and inflation “remains somewhat elevated.”

Officials dropped the observation that uncertainty over the economic outlook had diminished, but repeated the view that uncertainty “remains elevated.”

Waller and Bowman’s dissents marked the first time since 1993 that two members of the Board of Governors had voted against a committee decision. The FOMC includes seven governors and five of the 12 regional reserve bank presidents.

Waller voted against a committee decision in March to slow the pace of the bank’s balance-sheet runoff, while Bowman voted against the FOMC’s half-point cut in September in favor of a quarter-point move.

Tariff Impact

For months Fed officials have been bracing for higher unemployment and inflation as a result of an aggressive set of tariffs from the Trump administration.

Data released Wednesday showed gross domestic product increased an annualized 3% in the second quarter after shrinking at a 0.5% rate in the previous period. The swing was caused largely by the front-loading of imports in the first quarter to get ahead of tariffs. Consumer spending advanced at its slowest pace over consecutive quarters since the onset of the pandemic.

But the levies haven’t yet made a significant impact on inflation and employment data.

Inflation came in below estimates for the fifth straight month in June, though prices on some goods directly exposed to tariffs — including toys, apparel and electronics — jumped. Unemployment ticked lower to 4.1%, as the administration’s crackdown on immigration reduced labor supply.

Waller has warned, however, that private-sector payrolls showed signs of weakening, a view that informed his dissent.

While he and Bowman voted against the committee decision Wednesday, they may not be too far ahead of several other officials. In June, rate projections showed two policymakers favored three cuts this year, and eight more expected two cuts.

Investors had very low expectations for a cut at this meeting, but see around a 60% chance for a move in September, according to pricing in fed funds futures contracts.

Governor Adriana Kugler didn’t attend the meeting due a personal matter, according to a Fed spokesperson.

— By Maria Eloisa Capurro (Bloomberg)