Waiting Game: Fed Holds Steady, But Not Everyone’s on Board

As the Federal Reserve prepares to announce its latest policy decision this Wednesday, investors and traders are less focused on the outcome—which is widely expected to be a hold—and more on the tone and guidance that Chair Jerome Powell will deliver. The markets are pricing in a possible rate cut as early as September. But could the Fed surprise the market this month or decide to cut interest rates later than in September? The answer may depend not only on economic data but also on internal tensions within the Fed and the renewed political and trade pressures surrounding U.S. monetary policy.

Is the Fed Divided on Its Next Move?

The FOMC is expected to leave its policy rate unchanged in the 4.25%–4.50% range this week. Chair Powell has repeatedly stressed a data-dependent, wait-and-see approach, particularly given lingering inflation concerns and the uncertain economic outlook. However, not all Fed officials sing on the same hymn sheet.

Notably, Governor Christopher Waller, a Trump appointee, has called for a 25-basis point rate cut now, citing risks of slowing growth and easing inflationary pressure. While such a move is highly unlikely this week, his comments underscore a growing split within the Fed, with some policymakers eager to preempt a downturn and others determined to wait for clearer signs that inflation is cooling sustainably.

Does the Data Support a Cut—or Caution?

The U.S. economy contracted by 0.5% in Q1 2025, marking its first quarterly decline in three years. The drop was sharper than expected, driven by weak consumer spending and falling exports. However, markets expect a rebound: Q2 GDP is forecast to grow by 2.4%, with data due later this week.

Despite the slowdown, the labor market remains relatively strong:

• Job openings jumped by 374,000 in May to 7.77 million—the highest since November 2024—indicating sustained labor demand. June’s figures will be available tomorrow and market participants are expecting the number of job openings to rise to 7.550 million.
• Nonfarm payrolls added 147,000 jobs in June, comfortably beating expectations and matching the 12-month average. In July, analysts forecast US nonfarm payrolls to reach 110,000.
• The unemployment rate edged down to 4.1% in May and stayed stable in June, defying forecasts of a rise and showing remarkable stability in labor conditions. In July, however, analysts expect it to increase to 4.2%.

At the same time, inflation seems to remain sticky. The Fed’s preferred gauge, the core PCE price index, rose 2.7% year-on-year in May, slightly above expectations. Markets are expecting a 0.3% month-on-month increase in June, which could reinforce the Fed’s reluctance to act too soon.

Should inflation remain elevated or accelerate, rate cuts could be delayed—or rate hikes reconsidered, though for now, most see that as a low-probability scenario. The market is pricing in a 65% chance of a rate cut next September, as two job and CPI reports will be published.

Will Trade Tensions Derail Rate Cut Hopes?

Adding to the Fed’s dilemma is trade policy volatility. President Trump’s tariffs have reintroduced the specter of stagflation, potentially pushing prices higher while slowing growth. This complicates monetary policy, especially if tariff-driven inflation forces the Fed to delay cuts.

However, markets welcomed a breakthrough this week: Trump struck a major trade agreement with the EU, averting a costly transatlantic trade war. The deal includes a 15% baseline tariff on European goods and commitments for the EU to invest $600 billion in the U.S. and purchase $750 billion in U.S. energy products.

This deal boosted the U.S. dollar, offering short-term relief and sparking speculation about its potential impact on inflation, trade flows, and ultimately Fed policy.

The US Dollar Index is currently trading at 98.015, having bounced modestly from its recent low near 96.000 on this weekly chart. The index has gained 0.64% on the day, reflecting a short-term recovery following the US-EU trade agreement, which appears to have provided fresh support for the dollar.

The price action remains below the Ichimoku Cloud, suggesting the broader trend remains bearish. The Kijun-sen (blue line) and Tenkan-sen (red line) are also trending below the cloud and above current price levels, reinforcing resistance around the 100–102 range. The Chikou Span (lagging green line) is also below price and the cloud, further confirming the downward bias.

The RSI stands at 39.20, indicating the dollar is approaching oversold territory, but not yet in it. The RSI has shown a slight uptick, hinting at potential short-term bullish momentum or consolidation, particularly after a period of heavy selling.

The Dollar Index seemed to have formed a low near 96.000, which has acted as a support level. Any sustained move above 98.500 could open the door to a retest of the 100–102 resistance zone, especially if dovish signals emerge from the Fed or economic data surprises to the downside. Conversely, failure to hold above 97.000 could resume the downtrend, targeting 95.500 or lower, especially if risk sentiment improves or inflation data dampens expectations of Fed easing.

The short-term rebound in the dollar seems driven by relief from trade tensions and speculation around the Fed’s next move. However, the larger trend remains bearish unless the index can break above the Ichimoku cloud (~102). Near-term direction will likely hinge on upcoming job, growth and inflation data, as well as the Fed communication.

For now, Wednesday’s meeting will be about the tone, not the action. Market participants will scrutinize Powell’s remarks for any shift in language—especially signals that the Fed is preparing to pivot toward a more accommodative stance in September. But with internal disagreements growing louder and external pressures mounting, the Fed’s path forward is becoming less predictable.

Watch for any hawkish shift from the Fed this week or stronger inflation figures, which could reinforce the dollar’s rebound. Conversely, soft data and dovish Fed rhetoric may renew downward pressure.

Source: Reuters, The Wall Street Journal, BLS, Trading Economics, Investopedia, Morning Star