A House Divided: Fed Holds Firm as Two Governors Demand a Cut
The Federal Reserve's decision on July 30, 2025, to maintain the federal funds rate at 4.25%–4.50% revealed deep divisions marked by a rare double dissent. Governors Christopher J. Waller and Michelle W. Bowman argued for an immediate 25-basis-point rate cut, reflecting sharp disagreements over tariff impacts and labour market conditions.
Chair Jerome Powell and the majority consider recent tariff-induced inflation as potentially temporary, cautioning against premature easing that could undermine price stability. Powell cited the stable 4.1% unemployment rate as evidence of labour market resilience, supporting the Fed's restrictive policy stance.
Yet, recent labour data paints a more nuanced picture. July’s ADP payroll report showed private-sector employment increased by 104,000, surpassing forecasts but indicating a slowdown. Notably, small businesses added only 12,000 jobs, highlighting ongoing vulnerability due to high borrowing costs and tariff-driven price pressures.
Governor Waller emphasised underlying fragility, asserting the labour market is approaching "stall speed." He warned that superficial job growth numbers obscure deeper economic weaknesses.
Governor Bowman’s dissent highlights additional concerns, particularly within smaller community banks serving small businesses. Bowman argues that tariff disruptions, initially viewed as temporary, are now causing sustained economic distress, justifying immediate action by the Fed.
This mix of moderate employment growth and rising inflation poses a policy challenge. Tariffs raise the risk of stagflation—higher prices coupled with slower growth. Powell’s cautious approach prioritises inflation control, but dissenters argue continued restrictive policy could unnecessarily deepen economic slowdown risks.
Markets initially perceived Powell’s message as hawkish, resulting in modest stock declines and rising Treasury yields. Analysts remain divided, with Powell’s backers expecting tariff impacts to fade quickly, and dissenters seeing deeper vulnerabilities that require immediate easing.
Political factors complicate matters further. Waller and Bowman, appointed during the previous Trump administration, echo the President’s calls for lower interest rates, raising concerns about Fed independence as Powell's term nears its May 2026 expiry.
Today's nonfarm payroll release has significant implications. Weak numbers would bolster the dissenters’ argument for immediate easing, while stronger figures would validate Powell’s cautious "wait-and-see" stance.
As Governor Waller succinctly put it, "Waiting for undeniable weakness means waiting too long." Today’s payroll data may be pivotal in shaping the Fed’s next move.
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