August Fed minutes shows a divided house within the FOMC

22 Aug 2025 , 10:58 AM

STATUS QUO YES; BUT A VERY DIVIDED HOUSE

The uncertainty over Trump tariffs continued to be the subject of debate, but the real question for the FOMC (Federal Open Markets Committee) was “To cut or not to cut” rates. For the first time in 32 years, two senior Fed governors; Chris Waller and Michelle Bowman, gave a note of dissent. While the FOMC eventually voted for status quo on rates at 4.25% to 4.50%; Waller and Bowman wanted a 25 bps cut to be implemented immediately.

The dissent was over the degree of impact of Trump tariffs on inflation and jobs. The status quo camp believes that upside risks to inflation were much higher than the downside risks to jobs. However, dissenters were of the view that the inflation impact may be one-time, while the jobs impact will be structural. In a sense, their perception also got a boost from jobs data, showing weak non-farm payroll addition in May, June, and July 2025.

WHAT WE READ FROM MINUTES OF FOMC JUL-25 MEET?

Here are key inferences that we drew from the Fed minutes published on August 21, 2025; 3 weeks after the FOMC meeting on July 29-30, 2025.

• Federal Reserve officials expressed concerns about the impact of tariffs on labour market and inflation. The majority of members appeared to agree that it was still premature to lower interest rates. However, minutes did show rising divisions.
• The arguments to the downside risks to jobs assume significance after unemployment rate in July increased 10 bps to 4.2%, while non-farm payroll additions have stagnated at around 73,000. July also saw May and June non-farm payroll estimates being lowered.
• The dissent assumes significance as it is the first time that two governors in the FOMC have dissented since 1993. Both the dissenting members; Chris Waller and Michelle Bowman, favoured a cut in rates by 25 bps to ease jobs and consumer spending.
• The debate over inflation is more about persistence. The majority view was that inflation risks were higher due to tariffs. However, more members are now shifting to the view that impact on inflation could be one-time, while impact on jobs may be deeper.
• Of course, the big risk factor that all members see in the next few months is the outcome of the reciprocal tariffs. Interpretations on the extent of impact vary, but future trajectory of rates will depend on the interplay of jobs and inflation.

Let us turn to what CME Fedwatch says about rates trajectory.

CME FEDWATCH HINTS 2 RATE CUTS EACH IN 2025 AND 2026

The CME Fedwatch is based on implied probabilities of Fed Futures trading.

Fed Meet	200-225	225-250	250-275	275-300	300-325	325-350	350-375	375-400	400-425	425-450
Sep-25	Nil	Nil	Nil	Nil	Nil	Nil	Nil	Nil	75.3%	24.7%
Oct-25	Nil	Nil	Nil	Nil	Nil	Nil	Nil	37.0%	50.4%	12.5%
Dec-25	Nil	Nil	Nil	Nil	Nil	Nil	27.4%	46.9%	22.4%	3.3%
Jun-26	Nil	Nil	1.2%	7.9%	21.4%	30.6%	24.8%	11.3%	2.7%	0.3%
Dec-26	0.7%	3.2%	9.9%	19.6%	25.8%	22.5%	12.8%	4.5%	0.9%	0.1%

Data source: CME Fedwatch

We have CME Fedwatch expectations till December 2026; although the 2025 probabilities are more reliable due to proximity.

• CME Fedwatch suggests that, post the minutes, the probability of a September rate cut has reduced to 75.3%, although it is still convincingly high.
• CME Fedwatch suggests a strong possibility of 2 rate cuts in 2025, with the second rate cut in December. Probability of 2 rate cuts by December is as high as 74.3%.
• Markets are factoring in additional 2 rate cuts of 25 bps each in 2026; with 1 cut in H1-2026 and another cut in H2-2026. Probability of 2 more rate cuts in 2026 is 81.7%.

Clearly, the FOMC is split about the possible impact of the tariffs. The status quo camp believes that upside risks to inflation are higher due to tariffs. On the other hand, the dissent voices believe that inflation would be a one-time impact, while the impact on jobs would be more persistent. The implications remain the real bone of contention.

Going ahead, Powell’s term extends till May 2026 and he can get 2 more years. However, it is unclear if he will opt for an extension or choose to resign. Once Powell moves on, the view is likely to shift more towards the camp calling for rate cuts. That remains to be seen!