Fed Minutes Reveal Tepid GDP, Inflation Risks, and a Debate Over Rate Cuts

There are interesting minutes from the last FOMC meeting in July to discuss.

Please consider the Minutes of the Federal Open Market Committee July 29–30, 2025.

Staff Review of the Economic Situation

• Real GDP expanded at a tepid pace in the first half of the year. The unemployment rate continued to be low, and consumer price inflation remained somewhat elevated.
• Disinflation appeared to have stalled, with tariffs putting upward pressure on goods price inflation.
• Growth of real private domestic final purchases—which comprises PCE and private fixed investment and which often provides a better signal than GDP of underlying economic momentum—slowed in the second quarter, as a step-down in investment growth offset faster PCE growth.
• After exerting a substantial negative drag on GDP growth in the first quarter, net exports made a large positive contribution in the second quarter. Real imports of goods and services declined sharply, likely reflecting the aftereffects of the substantial front-loading of imports recorded in the first quarter ahead of anticipated tariff hikes. By contrast, exports of goods declined at a more moderate pace, and exports of services rose further.

Staff Economic Outlook

• The staff expected that the rise in the cost of imported goods inclusive of tariffs would be smaller and occur later than in their previous forecast; in addition, financial conditions were projected to be slightly more supportive of output growth.
• Positive influences on the outlook were offset by weaker-than-expected spending data and a smaller assumed population boost from net immigration.
• The staff continued to expect that the labor market would weaken, with the unemployment rate projected to move above the staff’s estimate of its natural rate around the end of this year and to remain above the natural rate through 2027.
• Risks to real activity were judged to remain skewed to the downside in light of the weakening in GDP growth seen so far this year and elevated policy uncertainty.
• The staff continued to view the risks around the inflation forecast as skewed to the upside, as the projected rise in inflation this year could prove to be more persistent than assumed in the baseline projection.

Participants’ Views on Current Conditions and the Economic Outlook

• Many participants observed that overall inflation remained somewhat above the Committee’s 2 percent longer-run goal.
• Participants noted that tariff effects were becoming more apparent in the data, as indicated by recent increases in goods price inflation, while services price inflation had continued to slow. A couple of participants suggested that tariff effects were masking the underlying trend of inflation and, setting aside the tariff effects, inflation was close to target.
• With regard to the outlook for inflation, participants generally expected inflation to increase in the near term. Participants judged that considerable uncertainty remained about the timing, magnitude, and persistence of the effects of this year’s increase in tariffs. In terms of timing, many participants noted that it could take some time for the full effects of higher tariffs to be felt in consumer goods and services prices. Participants cited several contributors to this likely lag. These included the stockpiling of inventories in anticipation of higher tariffs; slow pass-through of input cost increases into final goods and services prices; gradual updating of contract prices; maintenance of firm–customer relationships; issues related to tariff collection; and still-ongoing trade negotiations.
• In their consideration of monetary policy at this meeting, participants noted that inflation remained somewhat elevated. Participants also observed that recent indicators suggested that the growth of economic activity had moderated in the first half of the year, although swings in net exports and inventories had affected the measurement and interpretation of the data.
• Participants further noted that the unemployment rate remained at a low level and that the labor market was at or near maximum employment.
• Participants judged that uncertainty about the economic outlook remained elevated.
• Almost all participants viewed it as appropriate to maintain the target range for the federal funds rate at 4-1/4 to 4-1/2 percent at this meeting. All participants judged it appropriate to continue the process of reducing the Federal Reserve’s securities holdings.
• Participants noted that, if this year’s higher tariffs were to generate a larger-than-expected or a more-persistent-than-anticipated increase in inflation, or if medium- or longer-term inflation expectations were to increase notably, then it would be appropriate to maintain a more restrictive stance of monetary policy than would otherwise be the case, especially if labor market conditions remained solid. By contrast, if labor market conditions were to weaken materially or if inflation were to come down further and inflation expectations remained well anchored, then it would be appropriate to establish a less restrictive stance of monetary policy than would otherwise be the case. 

Committee Policy Actions

• In their discussions of monetary policy for this meeting, members agreed that although swings in net exports had affected the data, recent indicators suggested that the growth of economic activity had moderated in the first half of the year.
• Members agreed that the unemployment rate had remained at a low level and that labor market conditions had remained solid. Members concurred that inflation remained somewhat elevated.
• Members agreed that uncertainty about the economic outlook remained elevated and that the Committee was attentive to the risks to both sides of its dual mandate.

Fed dissenters appeared alone in favoring rate cut at July meeting, minutes show

Reuters reports Fed dissenters appeared alone in favoring rate cut at July meeting, minutes show

Fed Vice Chair for Supervision Michelle Bowman and Governor Christopher Waller both voted against the decision to leave the benchmark interest rate unchanged, favoring instead a quarter-percentage-point reduction to guard against further weakening of the job market. It was the first time since 1993 that more than one Fed governor dissented against a rate decision.

More unsettling, though, was an historic downward revision for estimates of employment in the previous two months. That revision erased more than a quarter of a million jobs thought to have been created in May and June and put a hefty dent in the prevailing narrative of a still-strong-job market. The event was so angering to President Donald Trump that he fired the head of the Bureau of Labor Statistics.

Data since then, however, has provided some fodder for the camp more concerned that Trump’s aggressive tariffs risk rekindling inflation to hold their ground against moving quickly to lower rates. The annual rate of underlying consumer inflation accelerated more than expected in July and was followed by an unexpectedly large jump in prices at the producer level.

Is the Labor Market Sound?

I strongly disagree with the assessment “the labor market is sound”.

That’s the way it always looks at the top of every business cycle.

Economists were shocked by the huge negative job revisions. I wasn’t, nor was anyone who follows the highly accurate Quarterly Census of Employment and Wages (QCEW) reports.

The discrepancy between the monthly nonfarm payroll reports and QCEW is high and rising. QCEW is about 95 percent of the data with 90 percent survey response.

Nonfarm payroll are about 30 percent of the data with 40 percent responding. Struggling businesses do respond.

The monthly jobs report was guaranteed at some point to break hard toward QCEW. And given the tariff uncertainties, AI, and weaker spending, there is no reason to expect a big hiring trend coming up.

Thus, regarding the labor market, I side with the doves.

The Inflation Hawks Mostly Correct

The tariff impact was slower and weaker than many expected. But an inventory build front-ran the tariffs.

Also, through June there were far more tariff exemptions than most realize. Trump is now cracking down on de minimis exemptions among other things.

The latest Producer Price Index (PPI) report shows a potential large passthrough of pending inflation.

Assessment

It’s easy to find support for the doves or the hawks, as noted above.

I don’t believe there should be a Fed, but given there is, holding pat was a reasonable policy action.

We still do not have the impact of Trump’s tariffs, now can anyone remotely predict what he may do next.

Nor do we know how the courts will rule on reciprocal tariffs.

One thing worse than the Fed as we know it is a Fed controlled by partisan politics. A lower rate would reduce interest on the national debt, but an artificially low rate would put upward pressure on long-term rates.

Looking Ahead

The next FOMC meeting is September 17, 2025.

Fed rate cut odds are interesting. A week ago, there was a zero percent chance the Fed would stand pat, with a 5.7 percent chance of a half-point cut.

Today, there is a zero percent chance of a half-point cut. And the odds the Fed stands pat are up from zero percent to 17.1 percent.

Q: What do I expect?
A: Ask me after the next jobs and CPI reports.

Producer Prices for July Rise the Most Since March 2022

On August 14, I reported Producer Prices for July Unexpectedly Rise the Most Since March 2022

Month-Over-Month Details

• Final Demand: 0.9 percent
• Final Demand Goods: 0.7 percent
• Final Demand Services: 1.1 percent
• Final Demand Food: 1.4 percent
• Final Demand Less Food and Energy: 0.9 percent

In a follow-up post I noted Producer Prices at Intermediate Stages Suggest Big Inflation on Deck

Intermediate prices will eventually impact consumer prices.

Related Posts

August 11, 2025: Over Half the US Has Major Stress Over the Price of Food

Are you stressed out over food?

August 12, 2025: Where Do You Spend Money on Food? How Screwed Up Are the BLS Weights?

Does the BLS match your budget?

August 12, 2025: The CPI for July Was a Mixed Bag of Good and Bad, Here’s the Details

The stock market liked the CPI report more than the bond market.

If inflation was tame, 86 percent of the country would not be concerned about the price of food.

However, a further weakening jobs market would be much more concerning.

In case you missed the QCEW clue, please see QCEW Report Shows Overstatement of Jobs by the BLS is Increasing

The problem for the Fed is the possibility of stagflation. We cannot rule that out.