Fed likely to hold rates steady amid inflation pressures, slower labor market: Analysts

Federal Reserve headquarters

Federal Reserve officials, led by Chairman Jerome Powell, are meeting on July 29-30 to decide on interest rates, amid evolving inflation data, the impact of tariffs, mixed signals from the labor market, and mounting political pressure from US President Donald Trump, who has renewed his calls for rate cuts.

A number of analysts surveyed by Argaam believe the Fed is likely to maintain the current interest rate range between 4.25% and 4.5%, citing insufficient evidence of a sustained slowdown in inflation and continued anticipation of upcoming economic data.

Zeina Rizk, Partner - Co-Head of Fixed Income at Amwal Capital Partners, expects the Fed to leave interest rates unchanged at the July meeting, explaining that the recent slowdown in inflation remains insufficient due to persistent structural pressures, particularly in the housing and services sectors.

Rizk noted that core inflation remains above the Fed’s target, prompting policymakers to remain cautious until a clear and consistent downward trend emerges.

Similarly, Ahmad Assiri, Research Strategist at Pepperstone, said recent monthly data show a volatile inflation pattern, with the consumer price index (CPI) increasing by 0.2% in April, 0.1% in May, and 0.3% in July, pushing the annual average to 2.7%.

He added that core inflation—which excludes energy and food—stood at 2.9%, partly reflecting the impact of recent tariffs on certain goods.

Assiri explained that inventory purchased before the new tariffs took effect delayed their full impact on May’s data, which only began to materialize clearly in July. He emphasized that the Fed is unlikely to cut rates unless inflation indicators show a real and sustained slowdown.

He also pointed out that while the Fed’s stance appears unified, this week’s meeting may witness a rare internal vote by two committee members—Christopher Waller and Michelle Bowman—in favor of a rate cut. This may signal internal disagreement or personal positioning, but it is unlikely to shift the broader consensus toward holding rates steady.

Mohammed Al-Farraj, Senior Director of Asset Management at Arbah Capital, stressed that inflation remains the Fed’s top priority and expects the current policy to continue unchanged through the end of Q3.

He noted that ongoing pressures in the services and housing sectors are keeping inflation relatively elevated, prompting the Fed to be cautious and avoid premature easing.

Labor Market: Between Resilience and Gradual Slowdown

Regarding the labor market, the three analysts agreed that the data reflects a gradual slowdown—not a crisis or sharp contraction.

Rizk said current figures do not signal a collapse but do point to mild signs of slowing.

Assiri noted that employment remains relatively stable, with 139,000 jobs added in May, 147,000 in June, and expectations exceeding 100,000 in July.

He added that the unemployment rate has stabilized at 4.1%, indicating resilience that gives the Fed room to wait until its September meeting before making any moves.

Al-Farraj agreed that these indicators give the Fed additional time to observe developments without making preemptive decisions. He added that while recent figures reflect an actual slowdown compared to previous months, they still fall within an acceptable range that allows for continued monitoring of economic conditions.

Rizk pointed out that the Fed is watching the impact of tariffs on growth, which could take six to eight months to fully materialize. She added that current labor market strength allows the Fed to remain patient until inflation trends become clearer.

She also highlighted additional factors—such as the deportation of immigrants and the growing use of artificial intelligence (AI)—that may put future downward pressure on the labor market, although these have not yet appeared in current indicators.

Rizk said that if the coming months bring a sharp drop in hiring or a spike in unemployment, the Fed may prioritize labor market stability and move to cut rates. However, if inflation continues to ease and the job market remains stable, the Fed is likely to maintain its wait-and-see approach.

Fed’s Independence Tested by Political Pressure

On the political front, Rizk believes President Trump’s repeated calls for rate cuts may create short-term market volatility but are unlikely to undermine the Fed’s independence, as its decisions remain driven by data.

She noted that markets have not reacted strongly to these statements so far, but investors will closely monitor the evolving relationship between the White House and the Fed.

Assiri pointed out that political pressure peaked when markets circulated reports that the White House was drafting a plan to remove Jerome Powell.

He said the bond market reacted sharply, with yields spiking, prompting the administration to deny such intentions. Moves like these, he added, are costly to markets and demonstrate that the independence of monetary policy remains a red line.

Al-Farraj also expects Powell to maintain the Fed’s independence despite intensifying political rhetoric, asserting that central bank decisions will not be directly swayed by such pressure—even if markets experience some volatility in response to political discourse.

Monetary Tightening Under Review

On quantitative tightening, analysts noted that the Fed began gradually reducing its bond repurchase program in May 2025, lowering the reinvestment cap to $5 billion per month.

Assiri said this approach could lead to a gradual decline in long-term yields and help stimulate asset prices, including stocks and commodities, with limited medium-term impact on the US dollar.

Al-Farraj agreed, adding that the Fed aims to end the program gradually by 2026 in line with market liquidity stabilization. He emphasized that such measures serve as indirect tools for adjusting market balance without altering interest rates directly.

He expects the ongoing reduction in quantitative tightening through 2026 to gradually push long-term yields lower, boost asset prices such as equities and commodities, and have only a limited effect on the dollar depending on global growth conditions.

September as a Decisive Turning Point

Assiri said the base-case scenario for this week remains a rate hold, with the first potential rate cut likely in September and a probability of about 60%. He emphasized that the upcoming jobs report will be a decisive factor—especially if job creation surpasses 100,000 and unemployment remains stable.

Rizk also expects the Fed to maintain interest rates for a longer period unless inflation surprises or the labor market weakens significantly. However, she added that if data unexpectedly shifts, the Fed could move toward rate cuts more quickly than currently anticipated.