by Paul Hoffmeister, Portfolio Manager and Chief Economist
The FOMC met on July 29-30 and voted in favor of keeping the fed funds target range at 4.25-4.5%, making the fifth consecutive pause in interest rate adjustments. The Fed hasn’t cut rates at all this year, which is in sharp contrast to the 100 basis points in cuts between September and December of last year. At one point last fall, financial markets, indicated by December 2025 fed funds futures, were expecting almost a 3% funds rate by the end of this year.
The Fed’s reluctance to reduce interest rates has clearly sparked the ire of President Trump, who is demanding fast and aggressive rate cuts. The President has nicknamed Chairman Powell “Too Late” and called him a “stubborn moron” and “numbskull”. In his view, the funds rate is at least 3 percentage points too high. The President’s criticism arguably reflects many voters, as recent Gallup surveys show that only 37% of Americans have confidence in the Fed Chairman. [1]
Based on the flat yield curve today and assuming that the long end of the curve would stay at current levels, an immediate cut of 300 basis points to the funds rate would make Fed policy as aggressively dovish as it was after the tech bubble burst (2001-2002) and the Global Financial Crisis (2009-2010).
Powell, for his part, is in an exceedingly difficult position, and the Fed is facing an almost impossible dilemma. Both sides of the interest rate debate seemingly have a compelling argument.
On the one hand, doves argue some variation of the following: the flat Treasury curve and the 2-year Treasury yield (almost 60bps lower than fed funds) are screaming that the Fed is too tight; the labor market is softening (Sahm Rule has been tripped, slowdown in job growth, rising unemployment claims, declining job openings); manufacturing has been contracting for most of the last 3 years (<50 ISM Manufacturing Index); and the services sector is on the verge of contraction (50.1 ISM Services Index for July).
On the other hand, rate hawks point to the strength in the equity markets, corporate profits, gold prices, and household net worth; along with high consumer prices and the official unemployment rate of 4.2%.
In our view, the ISM Services PMI data for July sums up the debate and dilemma. This relatively real-time data basically shows an emergent stagflation of rising inflation and weakening employment. Last month, the survey’s employment index fell to 46.4%, the fourth contraction in five months and lowest level since March. Meanwhile, the prices paid index jumped to 69.9%, the highest level since October 2022. With the service sector making up approximately three-quarters of the economy, the softening job growth and intensifying cost pressures are a worrisome trend.
Complicating matters, tariffs may be worsening the inflation outlook. A recent Federal Reserve Board working paper concluded that the China tariffs increased core-goods PCE prices by nearly 0.3 percentage points. Boston Fed research concluded that the President’s plan to impose 10% tariffs on China and 25% tariffs on Mexico and Canada would increase core PCE by 0.8 percentage points. And, Chicago Fed President Austan Goolsbee recently suggested that tariffs could raise inflation between 0.5 and 0.8 points, depending on how much those costs pass through businesses.
Muddying waters even more may be Fed credibility. It’s possible that some Fed members are inclined to cut interest rates but are concerned at the same time of being seen as caving to political pressure. Or, conversely, they could be reluctant to cut rates because of supposedly missing or failing to extinguish the inflation of 2022, where year-over-year core PCE jumped to 5.5% from 1% in 2020. These are psychological factors that may be almost impossible to accurately assess.
Fed policymaking might be an unenviable job these days. Unfortunately, these are the countless variables that factor into monetary policy decision-making when policymakers operate within a discretionary rather than rules-based system.
Notwithstanding the nature of the modern monetary regime, today’s policy debate and growing stagflation pressures, the policy bias at the Fed today is increasingly dovish. Not only did two FOMC members favor cutting rates in the last meeting, but President Trump has nominated his CEA Chairman Stephen Miran, a known dove, to the Fed Board of Governors. This has helped to push the December 2025 fed funds futures to expecting almost two quarter-point rate cuts by year-end.
If anything, Fed policy is ever so slowly moving in the direction of what market-based indicators such as the yield curve and 2-year Treasury are apparently demanding. And so, monetary policy will likely continue to evolve gradually unless extremes emerge in the future, whether it be economic or inflationary, demand more rapid action.
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[1] “Public Views of the Fed Chair Are Polarized as Trump Mulls His Firing”, by Ruth Igielnik, July 16, 2025, New York Times.
Paul Hoffmeister is Chief Economist and Portfolio Manager at Camelot Portfolios, managing partner of Camelot Event-Driven Advisors (CEDA), and co-portfolio manager of the Camelot Event-Driven Fund (EVDIX • EVDAX).
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