July Fed minutes show FOMC not inclined to cut rates now

15 Jul 2025 , 03:23 PM

THREE REASONS FOR STATUS QUO ON RATES

Amidst the ongoing fracas between Trump and Jerome Powell, the Federal Open Markets Committee (FOMC) appears to be quite clear. This is not the time to cut rates; is the unanimous decision of the FOMC, as indicated in the minutes of the June Fed meet. The Fed publishes minutes a full 21 days after the Fed statement. The Fed has assigned 3 major reasons why it does not see any valid reason to cut rates at this juncture.

Firstly, FOMC remains concerned that higher tariffs, when implemented, will be inflationary for the economy. Secondly, FOMC also expressed the view that the current rate range of 4.25%-4.50% was not much above the neutral rate of interest, so concerns over high rates impacting growth were not really valid. Thirdly, the unemployment has come down to 4.1% and GDP contraction in Q1 was an aberration due to temporary front-loading of imports.

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

Here are key inferences that we drew from the Fed minutes published on July 09, 2025.

• The combination of inflation risks and low unemployment rate at 4.1%, has induced the Fed to adopt a wait-and-watch approach. In fact, the Fed can afford to wait at this juncture, since there are no urgent demands for easing from the growth side.
• One thing that emerged is that some members of the FOMC are in favour of giving guidance about a rate cut in the latter part of the year. This would at least convince the markets that the Fed is sticking to its broad guidance of 25-50 bps rate cut in 2025.
• However, the dot plot of projected rate cuts is more interesting. If one were to sum up the responses in the dot plot, then the expectation is of 2 rate cuts in 2025 and up to 3 rate cuts in 2026 and 2027 combined. That will take Fed rates closer to 3.00%.
• FOMC members broadly agreed that while the risk of GDP contraction had come down, the risk of inflation spike had also come down. Also, the FOMC is of the view that in the event of tariff hike, the inflation impact would only be a one-time impact.
• One area of concern for the FOMC could be that consumer spending has slowed considerably, largely due to the uncertainty factor. Personal spending and retail sales have fallen in May, and if that continues, pressure may build on Fed to cut rates.

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
Jul-25	Nil	Nil	Nil	Nil	Nil	Nil	Nil	Nil	4.7%	95.3%
Sep-25	Nil	Nil	Nil	Nil	Nil	Nil	Nil	3.1%	64.6%	32.3%
Oct-25	Nil	Nil	Nil	Nil	Nil	Nil	1.8%	39.9%	45.3%	13.0%
Dec-25	Nil	Nil	Nil	Nil	Nil	1.4%	30.0%	43.9%	21.4%	3.4%
Jun-26	Nil	Nil	1.3%	8.0%	21.1%	30.1%	24.6%	11.6%	2.9%	0.3%
Dec-26	0.4%	2.4%	8.2%	17.8%	25.4%	24.0%	14.8%	5.7%	1.2%	0.1%

Data source: CME Fedwatch

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

• CME Fedwatch suggests that while July policy would again be status quo, the September policy could see the first 25 bps rate cut with a high probability of 67.7%.
• 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 75.2%.
• Markets are factoring in additional 2 rate cuts of 25 bps each in year 2026; with 1 cut happening in the first half of the year and the second cut in the other half.

What do these minutes suggest for the RBI policy trajectory? The RBI has cut rates by 100 bps between February, April, and June. With the RBI shifting its monetary stance back from accommodative to neutral, further rate cuts may be tough to come by. It looks like status quo for the RBI from here on!