FOMC Holds Interest Rates Steady at July 2025 Meeting

The Fed Funds Rate has been the subject of much political debate in recent months, despite the Fed’s independent nature. The White House has suggested that interest rates should be lowered, while some Fed leaders have argued that economic uncertainty warrants maintaining the current level for the present.

The FOMC met on July 29^th and 30^th and voted to hold the Fed Funds Rate steady amid the ongoing debate. Committee members also provided insight into the economic situation, and their rationale for maintaining interest rates.

FOMC Holds Interest Rates Steady

The FOMC voted to maintain the Fed Funds Rate at a target range of 4.25 – 4.50% for the fifth consecutive meeting. This important rate was last changed in December, when it was reduced by 0.25 percentage points.

The committee’s votes on the target Fed Funds Rate had been unanimous in each meeting prior to July. However, two members of the committee voted against the majority this month and preferred to lower the Fed Funds Rate.

Data Driving the FOMC’s Decisions

In the statement announcing the interest rate decision, the committee noted several pieces of economic data that influenced their view of the economy and, subsequently, their decision. The most notable of these economic indicators are the unemployment rate and the inflation rate, as the Fed has a dual mandate to manage these aspects of the economy. The committee also mentioned economic growth and uncertainty as contributors to their decision.

Unemployment Has Held Steady in Recent Months

The FOMC noted that “the unemployment rate remains low,” and recent data supports this claim. The Bureau of Labor Statistics reported that the unemployment rate held steady at 4.1% in June and has remained in a narrow range of 4.0 – 4.2% since May 2024.

The FOMC’s most recent projections – released in June – forecasted an end-of-year unemployment rate of 4.5%. This suggests a marked deterioration in the labor market in the second half of the year which has not yet materialized in the hard data.

Inflation Has Remained Relatively Stable For 3 Months

The other half of the Fed’s dual mandate – inflation – has also remained relatively stable in the past few months. The Personal Consumption Expenditures [PCE] Price Index rose by 2.3% in May, the most recent month for which data is available. This rate has remained in a narrow range between 2.2% and 2.3% since February. However, the inflation rate remains stubbornly above the Fed’s target of 2%.

The FOMC’s most recent forecasts suggest that the inflation rate will rise to 3.0% by the end of the year. These price hikes are expected to be driven by trade policies and the impact of tariffs.

Economic Growth Recovered in The Second Quarter

The Bureau of Economic Analysis reported that Real Gross Domestic Product [GDP] rose by 3.0% in the second quarter. This followed a 0.5% decline in the first quarter that economists and Fed officials have stated was the result of companies increasing imports ahead of tariffs.

The latest data showed a marked decline in imports during the second quarter, which helped to improve GDP. In addition, consumer spending increased, which further contributed to the rise. These factors were partially offset by lower investment and exports.

The June FOMC projections showed an annual GDP growth rate of 1.4% for 2025 as a whole. This equates to an average of 1.6% GDP growth in the final half of the year, should the projections hold true. This figure is only slightly below the long-term projected average growth rate of 1.8%.

Economic Uncertainty Remains Elevated

Chair Powell noted that trade policies continue to evolve, such as the ongoing determination of future tariffs. In the past few weeks, deals have been struck with Japan and the EU, but many of the future tariffs remain unknown.

Powell said that higher tariffs “have begun to show through more clearly to prices of some goods, but their overall effects on economic activity and inflation remain to be seen.” He went on to describe two scenarios that could form.

First, prices could adjust quickly to tariffs, and the overall impact on inflation would be short-lived. Conversely, tariffs could lead to persistent inflationary pressures.

The FOMC has decided to take a “wait-and-see” approach to the possible impact of tariffs on inflation. Chair Powell stated that the current monetary policy stance is appropriate to allow this approach while guarding against inflation risks.

Uncertainty Still Surrounds Rate Cuts Later This Year

Business leaders have two main sources of guidance about the future of interest rates – the FOMC’s forecasts and market projections. Both currently suggest that interest rates will decline later this year, though market estimates have shown significant uncertainty.

The FOMC’s most recent projections show an end-of-year Fed Funds Rate of 3.9%. This suggests a decline of about 0.5 percentage points from the current level. The Fed typically lowers interest rates in 0.25 percentage point increments, also known as “quarter-point” rate cuts.

Markets are becoming less certain that the Fed’s projected rate cuts will materialize. Approximately 53% of analysts now forecast that the FOMC will hold rates steady at the next meeting in September. Just a month ago, that number was about 5%, with the remainder of analysts projecting a rate cut.

Looking ahead, analyst opinions are divided on a year-end Fed Funds Rate. Approximately 12% expect no change to rates through the final meeting of the year, 38% anticipate a quarter-point rate cut this year, 38% expect rates to decline by half a point, and the remaining 12% forecast steeper cuts.

The FOMC’s most recent statement says “the Committee will carefully assess incoming data, the evolving outlook, and the balance of risks” when considering future monetary policy actions. Therefore, business leaders who also monitor incoming economic data will have a better chance of correctly predicting the future of interest rates and adjusting their decisions accordingly.

Follow ADM For More Valuable Insights and Interest Rate News

At American Deposit Management, we provide actionable insights for business and banking leaders to help inform their decisions. Our weekly articles cover the latest developments in monetary policy, business cash management, and banking.

Find our past articles on the Insights page and subscribe to our mailing list to have our valuable insights delivered straight to your inbox. Also, don’t forget to follow us on LinkedIn so you never miss an update.

BACK