Equities Face Uncertainty After Fed Minutes Highlight Inflation Risks and Slower Growth

Fed Minutes Show Cautious Hold as Tariffs Complicate Outlook

The Federal Reserve kept rates steady at 4.25%–4.50% at its July 29–30 meeting, signaling caution as inflation pressures from tariffs clash with signs of slowing growth. The minutes highlight a divided Committee, with two members favoring a 25-basis-point cut, arguing inflation—excluding tariffs—was near target while job gains slowed.

Tariffs Put a Wrench in Disinflation Story

Headline PCE inflation stood at 2.6% in June, with core at 2.8%. Disinflation progress has stalled as tariffs lift goods prices. Some Fed officials see the impact as temporary, while others warn prolonged effects could raise expectations. Policymakers emphasized they will not wait for perfect clarity before adjusting policy, keeping markets focused on upcoming inflation data.

Job Market Solid but Cracks Begin to Show

The unemployment rate ticked up to 4.2%, still historically low, but private payroll gains slowed and were concentrated in fewer sectors. Fed staff project unemployment rising above its natural rate by year-end, reflecting softer demand and reduced immigration-driven labor supply. GDP growth has been tepid in the first half, with weaker consumption, housing, and business investment offset partly by trade. Several participants expect subdued activity through year-end.

Markets Rally but Fed Flags Hidden Risks

Equities rallied into the meeting on AI-driven optimism, but officials flagged stretched valuations. Narrower credit spreads suggested resilience, though risks remain in commercial real estate, private debt, and leveraged loans. The Fed also pointed to new risks tied to the rapid growth of payment stablecoins under the GENIUS Act, which could reshape liquidity conditions.

Data-Dependent Fed Keeps Traders Guessing

Most participants judged inflation risks outweigh employment risks, but a growing minority warned downside risks to growth are building. The Fed’s data-dependent stance leaves traders bracing for volatility: hotter inflation prints could keep policy “higher for longer,” while weaker labor data may open the door to cuts later this year.

For markets, the near-term read is supportive for equities, especially tech, with no new tightening signaled. But end-2025 could see greater swings as the Fed confronts the dual challenge of sticky inflation and softening jobs. Traders should expect short bursts of optimism on dovish signals, punctuated by pullbacks if inflation proves persistent.

More Information in our Economic Calendar.