The question and answer is over and Powell played it down the middle of the road.
The Fed held rates steady, but a historic split emerged. For the first time in over three decades, two voting members—Governors Michelle Bowman and Christopher Waller—dissented, favoring a 25bps rate cut. Nine members voted to keep rates unchanged, with one voter absent.
Fed Chair Powell acknowledged some softening in consumer spending and “chinks in the armor” of the labor market, particularly in private sector job creation. Still, he and the majority judged it prudent to wait, emphasizing that the economy remains in a solid position. He noted that last month’s employment gains were largely government-driven, adding extra weight to this Friday’s jobs report.
On inflation, Powell reiterated that it remains above the 2% target, even excluding tariff effects. He described the future impact of tariffs as uncertain, though allowed that a one-time price level increase is a reasonable base case. Nevertheless, he maintained a cautious stance, unwilling to signal a September cut.
Importantly, the Fed will receive two more inflation and jobs reports before the September meeting, which Powell said will inform their decision. He also confirmed the dissenters would explain their rationale in the coming days, and characterized the meeting as one of the most engaging he’s participated in.
Addressing housing, Powell said the best support the Fed can offer is to achieve 2% inflation and maximum employment, noting that the Fed does not control longer-term yields that affect mortgage rates.
Market expectations reacted accordingly: the odds of a September cut dropped from 68% to 49%, and the October probability declined from 83% to 69%.
The US stocks moved lower. The NASDAQ index was up around 100 points at session highs and it is currently down -55 points. The Dow industrial average is down -0.76% currently (it has been lagging). The S&P is down -24 points -0.39%
1. Economic outlook
The economy is in a solid position.
GDP and private domestic final purchases (PDFP) came in as expected.
Moderation in growth reflects a slowdown in consumer spending.
Consumer spending has been very strong in recent years but is now slowing to a healthy level.
Activity and housing sector remain weak.
GDP is hard to interpret due to swings in net exports.
There may be a minor stimulative effect from the tax bill, but not a major one.
2. Inflation
Inflation is above the 2% target.
Expects PCE to rise 2.5% and core PCE 2.7% year-over-year through June.
Inflation is running a bit above target even excluding the impact of tariffs.
Goods inflation is drifting away from target, but not very far.
Tariffs are starting to show up in some consumer prices and exerting pressure on some goods.
A reasonable base case is that this is a one-time increase in price levels, but that’s uncertain.
Most long-run inflation expectations remain consistent with the 2% goal.
Inflation risks exist on both sides: higher inflation and higher unemployment.
3. Labor market
Unemployment is low and remains in a narrow range.
A wide set of indicators suggests the job market is near maximum employment.
Job creation has slowed, especially in the private sector.
Demand and supply for workers are coming down at a similar rate.
There are downside risks in the labor market.
The breakeven number for job creation has come down.
The main number to watch now is the unemployment rate.
Totality of labor market data shows a solid market but downside risks remain.
4. Policy stance and outlook
Current stance of policy is modestly restrictive.
Powell believes the stance leaves the Fed well-positioned to respond in a timely way.
Monetary policy is not inappropriately restraining the economy.
No decision has been made for September; two employment and inflation reports are due before then.
The Fed is on track to wrap up its policy review by late summer.
Expects to have more data soon to better assess inflation and employment.
Will take incoming data, evolving outlook, and risks into consideration.
The Fed does not consider the cost to government of rate changes to preserve credibility.
5. Tariffs and external risks
Tariffs have added uncertainty and begun impacting consumer prices.
Uncertainty remains high, and Powell said "we still have a long way to go" in understanding tariff impacts.
Consumers and retailers will share some cost of the tariffs.
Trade negotiations are dynamic and unresolved.
6. Governance and communication
Powell supports clear explanations for dissenting votes.
Dissents from Waller and Bowman will be explained soon.
Differences in views are expected and normal.
Having an independent central bank has served the public well.
The Fed does not speak on the dollar—only the Treasury does.
Government data is the "gold standard" and essential for decision-making.
