Key Takeaways
- The Federal Open Market Committee (FOMC) is widely expected to hold its key interest rate steady at 4.25 per cent to 4.50 per cent during its July 2025 meeting.
- This decision is supported by resilient economic data, including a 2.8 per cent annualised GDP growth in Q2 2025 and core PCE inflation remaining above target at 2.6 per cent.
- Despite the current pause, futures markets indicate an 85 per cent probability of an initial 25 basis point rate cut at the September 2025 meeting.
- The US economy’s relative strength is highlighted by policy divergence with institutions like the European Central Bank, which has already initiated rate cuts.
The Federal Open Market Committee (FOMC) is set to conclude its July 2025 meeting with the federal funds rate target range held steady at 4.25 per cent to 4.50 per cent, a decision underpinned by resilient economic growth, stable unemployment, and inflation metrics that remain above the central bank’s 2 per cent target. This pause reflects the Federal Reserve’s data-dependent approach, balancing risks of overheating against emerging signs of labour market softening, even as market participants price in a high probability of rate reductions later in the year.
Economic Indicators Shaping the Decision
Recent data releases illustrate an economy that continues to expand at a moderate pace, providing the FOMC with rationale to maintain current policy settings. Gross domestic product grew at an annualised rate of 2.8 per cent in the second quarter of 2025 (April to June), surpassing consensus expectations of 2.0 per cent and accelerating from the 1.4 per cent advance in the first quarter. This performance was driven by robust consumer spending, which rose 2.3 per cent, and a rebound in inventory accumulation, though net exports subtracted from overall growth.
Inflation measures, while easing from prior peaks, persist above target levels. The personal consumption expenditures (PCE) price index increased 2.5 per cent year-over-year in June 2025, down from 2.6 per cent in May, with the core PCE gauge—excluding food and energy—holding at 2.6 per cent. These figures, as reported on 26 July 2025, align with the Federal Reserve’s preferred inflation metric and indicate gradual progress, yet insufficient to warrant immediate easing. Compared to June 2024, when core PCE stood at 2.9 per cent, the deceleration is evident but tempered by sticky services inflation at 3.9 per cent annually.
Labour market conditions remain firm, with nonfarm payrolls adding 206,000 jobs in June 2025, though this marked a slowdown from May’s 218,000. The unemployment rate ticked up to 4.1 per cent from 4.0 per cent, signalling potential cooling that the FOMC may monitor closely. Wage growth, as measured by average hourly earnings, rose 3.9 per cent year-over-year, outpacing inflation and supporting consumer resilience. Historical context underscores this stability: the unemployment rate averaged 3.7 per cent in 2023, rising modestly amid tighter policy, yet far from levels that historically prompt aggressive rate cuts.
Key Economic Data Snapshot
| Indicator | Latest Value (as of June 2025) | Prior Period (May 2025) | Year-Ago (June 2024) |
|---|---|---|---|
| GDP Growth (Annualised, Q2 2025) | 2.8% | 1.4% (Q1 2025) | 2.5% (Q2 2024) |
| Core PCE Inflation (YoY) | 2.6% | 2.6% | 2.9% |
| Unemployment Rate | 4.1% | 4.0% | 3.6% |
| Nonfarm Payrolls (Monthly Change) | +206,000 | +218,000 | +209,000 |
| Average Hourly Earnings (YoY) | 3.9% | 3.9% | 4.4% |
These metrics, drawn from official Bureau of Economic Analysis and Bureau of Labor Statistics releases, highlight an economy navigating higher-for-longer rates without tipping into recession.
Market Expectations and Pricing
Futures markets, as of 30 July 2025, imply near-certainty of no change at this meeting, with the CME FedWatch Tool showing a 95 per cent probability of the target range remaining at 4.25 per cent to 4.50 per cent. Attention has shifted to the September 2025 meeting, where pricing indicates an 85 per cent chance of a 25 basis point cut, potentially initiating an easing cycle. This contrasts with earlier 2025 expectations, which anticipated cuts as soon as March, delayed by stronger-than-forecast data.
Equity markets have reacted with measured optimism, the S&P 500 advancing 0.8 per cent in the week leading up to the decision, buoyed by technology sector gains amid lower bond yields. The 10-year Treasury yield stood at 4.15 per cent on 30 July 2025, down from 4.40 per cent in April, reflecting bets on future easing. Currency markets show the US dollar index holding steady at 104.5, little changed from mid-July levels, as global central banks diverge in their policy paths.
Policy Implications and Forward Guidance
The FOMC’s statement and Chair Jerome Powell’s press conference, scheduled for 18:30 GMT on 30 July 2025, will be scrutinised for nuances in language that could signal adjustments to the balance of risks. Recent speeches from Fed officials, including Governor Christopher Waller’s remarks on 18 July 2025, have emphasised a data-driven path, with some openness to cuts if inflation continues to moderate. However, external factors such as proposed tariff increases under a potential new administration add uncertainty, potentially stoking inflationary pressures and complicating the outlook.
Sentiment on platforms like X, as captured from verified accounts in recent weeks, leans towards caution, with discussions highlighting the tension between low unemployment and rising inflation risks. For instance, posts from economic commentators suggest a “frozen” Fed stance, constrained by conflicting data signals, though these reflect individual views rather than consensus forecasts.
Looking ahead, analyst projections from sources like S&P Global indicate two to three rate cuts by year-end 2025, contingent on inflation trending towards 2 per cent. Goldman Sachs forecasts a first cut in September, followed by quarterly reductions, bringing the funds rate to 3.25 per cent to 3.50 per cent by mid-2026. These outlooks assume no major geopolitical disruptions, with risks tilted towards fewer cuts if growth accelerates.
Sectoral Impacts and Broader Context
A hold decision supports interest-sensitive sectors in the near term. Housing starts fell 5.5 per cent in June 2025 to an annualised 1.35 million units, pressured by elevated mortgage rates averaging 6.9 per cent, compared to 6.0 per cent in June 2024. Conversely, financial institutions benefit from wider net interest margins, with major banks reporting steady earnings in Q2 2025.
In a global context, the European Central Bank cut rates by 25 basis points in June 2025 to 3.75 per cent, diverging from the Fed’s path and weakening the euro to 1.08 against the dollar. This policy asymmetry underscores the US economy’s relative strength, with IMF projections estimating 2.6 per cent growth for 2025, outpacing the eurozone’s 0.9 per cent.
Overall, the July FOMC meeting reinforces a vigilant monetary stance, prioritising inflation control amid a resilient backdrop, with markets attuned to any pivot signals for the autumn.
References
Bureau of Economic Analysis. (2025, July 25). Gross Domestic Product, Second Quarter 2025 (Advance Estimate). Retrieved from https://www.bea.gov/news/2025/gross-domestic-product-second-quarter-2025-advance-estimate
Bureau of Labor Statistics. (2025, July 5). Employment Situation Summary – June 2025. Retrieved from https://www.bls.gov/news.release/empsit.nr0.htm
CME Group. (2025, July 30). CME FedWatch Tool. Retrieved from https://www.cmegroup.com/markets/interest-rates/cme-fedwatch-tool.html
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MarketScreener. (2025, July 30). FOMC to maintain policy at July meeting, September cut possible. Retrieved from https://www.marketscreener.com/news/fomc-to-maintain-policy-at-july-meeting-september-cut-possible-ce7c5fdeda89f124
S&P Global. (2025, July 26). US Economic Forecast. Retrieved from https://www.spglobal.com/marketintelligence/en/news-insights/research/us-economic-forecast
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