The Federal Reserve left interest rates unchanged at this week’s FOMC meeting. As expected, Vice Chair for Supervision Michelle Bowman and Governor Chris Waller both dissented in favor of cutting rate. Federal Reserve Chair Jerome Powell struck a defiant tone in response to pressure from the White House and gave no hint that the Fed was leaning toward a September cut although he didn’t exclude that option. For now, we retain a 60% chance of a rate cut in September. It’s still very much a data dependent exercise.

Powell is not seeing enough in the labor market or inflation data yet to warrant a rate cut. Powell didn’t give any ground for a return to the “recalibration” path that proceeded Trump’s tariff policy. Still, we thought it was premature for Powell to give any clear direction on September. There is plenty of time and data between now and September for the Fed to build a case for or against a rate cut.

After two months on hold, the Bank of England (BOE) looks set to resume monetary easing with a 25 basis-point cut in rates to 4 percent next week amid contracting UK growth and a weakening labor market.

Three Monetary Policy Committee (MPC) voters dissented from June’s decision to hold, advocating a cut amid committee momentum toward more easing, and on July 1, even Governor Andrew Bailey told a panel, “we’ll see” when he was asked if the Bank would cut rates on August 7.

Inflation is still well above target following the surprise increase in June to 3.6%. So this time around it’s possible the MPC’s vote split could shift to reflect concern by the likes of chief economist Huw Pill who does not yet have sufficient confidence that inflation will slow to target in a timely manner.

If Pill dissents, he may be joined by external member Catherine Mann though her protest would depend on whether she views overall conditions as sufficiently constraining to see inflation back to target in the Bank’s projection timeframe. The Bank has said inflation will peak around 3.7% this quarter before it eases back to target early next year.

Despite enormous pressure from the White House, the Fed will not cut policy rates at the end of this week’s FOMC meeting. While there will be a discussion about rate cuts given that Governor Chris Waller will argue that point, the consensus supports holding rates steady as the Fed considers incoming inflation data. We expect Fed Chair Jay Powell will leave a September rate cut on the table and add that the Fed will produce a fresh SEP at that time. Any comment beyond that on September’s meeting two months out would only raise President Trump’s ire even more; there is plenty of time between now and September, including the August Jackson Hole conference, for the data and Fedspeak to guide market participants to the policy outcome.

Some interesting comments from an economic official in China in the run-up to US Treasury Secretary Scott Bessent’s meeting next week in Stockholm with his Chinese counterpart, Vice-Premier He Lifeng, very lightly edited and bolded for emphasis and flow:
I believe that the China-US talks in Stockholm will continue to make progress like the previous two talks in Geneva and London, and the China-US trade truce that is due to expire in mid-August will definitely be extended.

As we have written repeatedly, the 10% baseline US tariff for all European goods (with some exemptions for various industries), that the EU had thought was the basis of a deal in the making, is no longer valid and Sefcovic was told Trump would not accept less than 15%, or even higher, as the baseline, with steel and aluminum at 50% and pharmaceuticals, the production of which Trump very much wants to bring back to the US, possibly at an also prohibitively elevated rate.

Not surprisingly, EU officials are unsure if this is just Trump’s negotiating tactics, making bigger demands just before the deadline on August 1 only to make the final, less horrible deal look sweeter, or whether it could be the “real deal”.

That said, one senior European official said he believed the landing zone now was at 15% tariff as a baseline, but with exemptions that could get it lower in some cases to 12-13% for some sectors. Even this might be just wishful thinking – in fact, nobody knows what Trump and his team will drive.

Clients need to consider the degree to which the White House rather than the next Fed chair will be shaping monetary policy. The Chair is only one vote, albeit an important vote. To reshape the Fed, the White House needs to remake the Board, which presumably means a block of Trump-nominees sufficient to out-vote the five regional Presidents that make up the FOMC. Only Kugler and presumably Powell’s seats are available to fill in 2026, which would increase the number of Trump appointees to four. While we think commitment to the Fed as an institution would tie Jefferson, Cook, and Barr to their seats, there is also the possibility that the White House, or the next Fed Chair, pushes for change to those seats as well.

President Xi does not think or expect President Trump will visit China in early September and attend the September 3 military parade, but the President expects Trump to visit China at the end of October, before they both attend the APEC Summit in Gyeongju, South Korea.

For months we resisted the popular market narrative that insisted the Bank of Canada (BOC) was nearing the end of its easing cycle.

Those who have engaged us on Canada in person or otherwise over the last few months would be familiar with our view that the economy was facing a potential recession.

We noted in our last report that June’s meeting tone suggested that unless inflation data surprises to the upside, a rate cut was likely at the July 30 meeting (“see SGH 6/4/25; “BOC: Backloading Further Easing”).

While we’re not yet confident the Bank will pull the trigger this month, we remain convinced it will ease by another 50 basis points this year to head off a potential recession.

Bottom Line: The Fed isn’t cutting in July. It may be cutting in September, and there are two paths to that cut, lower inflation or a weaker labor market. We think market participants should also be looking at the possibility of a 50bp cut in September, especially if Waller and Bowman are correct in their assessment that a July cut should be very much on the table.

We can envision a scenario where Iran’s response is a token and limited strike against US regional interests, reminiscent of Iran’s response to Trump’s first term elimination of Revolutionary Guard and Qods force commander Qasem Soleimani in January of 2020. Then, Iran fired at alert and prepared US bases, with no fatalities, and thus no need for an escalatory spiral beyond a slap down in return from the United States.

For those same reasons, we think there is nothing to gain, and a lot to lose, for Iran’s Ayatollah Khamenei and the Iranian Revolutionary Guards Corps to mine or attack the Straits of Hormuz, dragging the region and rest of the world against Iran, and destroying the shreds that are left of Iran’s economy. That is not conducive to regime survival, and we suspect the operative mood in Tehran is to “make it stop” and limp back after some more military back and forth to the negotiating table. If they can.

We find it highly implausible that Israel will refrain from attacks on Iran’s underground Fordow enrichment facility to allow nuclear negotiations to resume between the Islamic Republic and United States, despite signals that have been allegedly sent through “Arab” intermediaries (read, Oman) that Iran wants to de-escalate and resume talks.

Furthermore, we think it very likely that US President Donald Trump will authorize American B-2 bombers being lined up in the Diego Garcia military base to drop the 30,000-pound GBU-57 bunker busting ordnances required to destroy Fordow, as opposed to leaving Israel to go it alone with an extended bombing campaign with less powerful bunker busters and commando raids to achieve that objective.

Main event will be the June FOMC with Wednesday’s release of the statement, SEP and press conference. We expect the SEP to reflect a more pronounced supply shock with slower growth and higher inflation and unemployment.

We anticipate minimal changes to the FOMC statement. There is generally a high bar to changing the statement and we think that FOMC participants remain comfortable with the “hold steady” path they have carved out and believe it is too early to shift gears to a new narrative. That said, there is room for some wordsmithing of this paragraph:

The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run. Uncertainty about the economic outlook has increased further. The Committee is attentive to the risks to both sides of its dual mandate and judges that the risks of higher unemployment and higher inflation have risen.

Uncertainty has not increased further since the May FOMC meeting, and arguably the willingness of the Trump administration to course correct after the spring’s market meltdown has lessened uncertainty, although not enough to alleviate the concerns addressed in the final sentence of the above quote.