Will Powell Cut in July? How Markets Are Preparing for a Fed Pivot in the Face of Inflation and Tariffs

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Introduction

As inflation decelerates and growth concerns intensify, pressure is building on Federal Reserve Chairman Jerome Powell to cut interest rates in 2025. Having kept benchmark rates at a 22-year peak for over one year, the Fed faces new pressure from investors, politicians, and economists. Powell’s path, however, is complicated by uncertainties overseas, in the shape of renewed tariffs and geopolitics. The big question: Will July be the month that the Fed finally turns?

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Inflation Cooling, But Not Cut Out

April 2025 inflation readings registered encouraging tendencies: Core PCE, the inflation gauge most popular with the Fed, declined to 2.1%, barely above the central bank’s 2% threshold. Consumer spending is slowing, and housing expenses are moderating. These tendencies have been spurring calls for monetary easing.

But certain inflationary pressures linger. Services inflation, especially in the insurance and healthcare industries, remains on the rise. And newly levied tariffs by the U.S. government on Chinese, European, and Mexican imports could potentially exert upward pressure on prices this summer.

Fed officials have acknowledged this tug-of-war. “While inflation is clearly moving in the right direction, we must be careful against new price shocks,” said Fed Governor Adriana Kugler.

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The Tariff Trap

Compounding the issues are the new tariffs imposed by the U.S. in Q1 2025, something many economists claim will put upward pressure on a number of sectors’ prices. The new tariffs on steel, semiconductors, and EV batteries are underpinned by a broader agenda of supply chains being brought home. The actions, however, reignited inflationary concerns when the Fed is set to loosen.

Kansas City Fed President Jeffrey Schmid stated that tariffs would likely “add noise to the data,” making it harder for the Fed to determine if disinflation is real. St. Louis Fed President Alberto Musalem also said there is a “50/50 chance these trade policies will prolong inflationary pressures.”

That makes a difference in a global setting. The European Central Bank is already relaxing, lowering rates to 2% in May. The Fed now finds itself under pressure to follow suit or else it will create a significant interest rate divergence that will impact capital flows and the dollar.

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Market Expectations Shift to July

It was only last month that June cut expectations were placed by traders. Those views have now vanished. Today, CME FedWatch indicates most traders now expect the first rate cut at the July FOMC meeting. The probability of a June cut is now less than 30%, with the July meeting now the de facto pivot point.

Large institutional investors such as State Street Global Advisors and Fidelity are now predicting three 2025 cuts, beginning in July. These expectations are predicated on weakening labor market data and decelerating GDP growth, which reached merely 1.4% in Q1.

“We think that July’s meeting gives the Fed political and economic cover to begin reductions,” stated Anna Wong, Bloomberg’s Chief U.S. Economist. “The data are supportive, but the Fed doesn’t want to see the return of inflation.”

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Fed Officials Still Cautious

Contrary to market sentiment, the Fed’s communications remain guarded. Powell himself has been careful not to make any particular comments on timing. Referring at a recent conference, he reiterated that the Fed will be data-dependent and will only act when it is “confident inflation is coming back to 2% on a sustained basis.”

The other members of the FOMC agreed with this view. Philadelphia Fed President Patrick Harker said, “We need to see a few more months of consistent data before we can act.”

Fed Governor Christopher Waller provided a slightly softer tone, implying that reductions might come “late in the year if the trade and inflation environment doesn’t get better.”

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Global Pressures Add Complexity

Outside the U.S., central banks are beginning to act. The ECB’s reduction in the May rate was the initial rate cut among major economies this cycle, and others like Canada, the UK, and New Zealand are hinting that they will follow suit.

This divergence places the Fed under pressure. A greater interest rate spread could strengthen the dollar, make U.S. exports less competitive, and further reduce growth.

At the same time, geopolitical tensions in the Middle East and Taiwan Strait have added to market volatility. Investors are increasingly looking to the Fed to stabilize things even as its policy elbow room remains constrained.

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Implications for Investors

Bond markets have been first off the block. Yields on 10-year Treasuries have declined to below 4.1% based on expectations of a reduction, while short-term yields keep increasing, an indication of market uncertainty.

Equities have been uneven. Tech stocks have bounced on hopes of relief, but cyclicals and small caps remain pressured by persistent cost pressures.

Currency markets are also anxious. A late Fed pivot could further widen the interest rate differential between the U.S. and its trade partners, which would lower the dollar over the medium term.

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What Comes Next

The center of attention now rests with the June 17–18 FOMC meeting. While a rate cut is unlikely, the tone of Powell’s announcement and the updated dot plot will provide significant guidance. Provided that inflation continues to ease and tariffs do not spike, the July cut is increasingly likely.

Investors should also watch for:

• May CPI and Core PCE releases (expected mid-June)
• Unemployment and wage growth figures
• Any Q1 GDP updates
• New developments on tariffs or trade negotiations

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Conclusion

The Federal Reserve is at a crossroads. Inflation is headed in the right direction, but tariffs and global uncertainty cloud the picture. Investors are betting that July is when Powell will pivot, but the Fed may wait for more definitive signals. For now, cautious optimism prevails, but each successive datapoint will determine the path forward.