Chair Jerome Powell and the Federal Reserve have gotten cold feet about any early interest rate cuts. This is all happening despite expectations in the market for cuts later this year. In recent testimony to Congress, Powell recognized the conundrum of choices the Fed now faces. He urged states to focus on the right indicators and be very thoughtful before jumping to any big decision.
In their follow-up message, market analysts forecast that the Federal Reserve will enact two more 25 basis point rate cuts in September and December. Powell noted that the next September Federal Open Market Committee (FOMC) meeting is coming up quickly. He says it’s still too soon for the Fed to be comfortable making those changes. The bulk of Fed officials are apparently skeptical about the so-called market-implied odds of rate cuts happening before December.
Economic Indicators and Inflation Expectations
In the alternative, a more aggressive Fed move would be to cut 50 basis points all at once in December. They will only make this move if the economic conditions require it. The Fed’s current baseline outlook has the EUR/USD exchange rate floating between 1.14 and 1.15 in the long run. Look for this trend to carry into the next few months.
Fed officials have made it clear that they are especially interested in validating month-on-month inflation trends with the reports out in October and November. Inflation is still a very top priority. Most on the Street think the recently enacted tariffs will just result in a one-time price increase, with inflation rates month-on-month coming back down to earth after that.
According to the Fed’s Beige Book, “there were widespread reports of contacts expecting costs and prices to rise at a faster rate going forward. A few Districts described these expected cost increases as strong, significant, or substantial.”
Market Sentiment and Fed Projections
The market seems to think that the Fed will soon be pivoting to looser monetary policy. Much remains unclear regarding the form and timing of these changes. This would reflect monthly inflation rates increasing between 0.4% and 0.5% from July through September. So this bump would actually help guide the Fed’s thinking.
Seven of 19 of the individual Fed members’ forecasts show no rate cuts this year. This is an important fact to keep in mind. At a time full of uncertain contours to our economic landscape, these divergent opinions underscore the confusion. Almost certainly big changes ahead in the Fed’s policy outlook, as ongoing economic and political developments continue to play out.
After several months of increasing optimism, the Fed has changed its economic projections again. In response, it has lowered its fourth quarter 2026 year-on-year GDP growth forecast from 1.8% to 1.6%. The core Personal Consumption Expenditures (PCE) index was revised upward, from 2.2% to 2.4%. This monetary policy shift now foresees just a single future 25 basis point cut in 2026, rather than the two cuts that had recently been predicted.
The Federal Reserve’s Independence and Future Directions
The Federal Reserve’s current approach to interest rate adjustments demonstrates its credibility and independence in pursuing difficult tradeoffs against constantly evolving economic realities. This careful approach is designed to avoid a capitulation of the dollar and the ensuing chaos it would create in financial markets.
As the Federal Reserve approaches future meetings, one thing is clear – officials will have to pay close attention to economic indicators and inflation trends. Our sense of consensus seems to favor a December rate cut, with a larger cut likely if needed.