Why the Fed didn’t cut rates, despite tariff risks and softer jobs data

When the Federal Reserve (Fed) delivered its decision at the end of July, we understood why the committee opted to stay on hold – but the latest data suggests economic conditions are already evolving in a way to prompt a move soon. This edition of your Top Market Takeaways: Quick Shot explores why.

A note before we dive in: For anyone who may need a refresher on how the Fed operates, its policy decisions are made by a Federal Open Markets Committee of 12 voting members and a handful of other Fed officials are invited to contribute to the conversation at meetings. While the Fed pays close attention to a plethora of data that paint the picture of broad economic conditions, its formal mandate is to prioritize just two elements in its decision making process: Maximizing employment (i.e., keeping unemployment low) and maintaining price stability (i.e., keeping inflation in check).

With that out of the way, let’s get into it.

The Fed’s latest policy rate decision was made on July 30 and the information on employment conditions they had in-hand suggested relative resilience. The unemployment rate was 4.1% (a tick below the Fed’s own long-run estimate of where that rate would settle in a “normal” phase of economic stability) and weekly jobless claims data looked typical for the time of year. Monthly job creation was running about in-line with the 10-year average clip of 148,000 even if it had been concentrated in a few areas like state and local government and healthcare, while wage growth continued to outpace the rate at which economy-wide prices were rising.

That wasn’t a picture of a jobs market in need of an immediate rate cut, especially with inflation still running at an above-target rate of 2.7% and new tariffs threatening to push it higher. That’s not to say that 2025’s trend in inflation hasn’t been encouraging, with measures like core Consumer Price Index (CPI) having declined 40 basis points since the Fed last cut rates in December. Regardless, a resurgence in price pressures in sectors with very direct exposure to tariffs – like furniture, for example – had Fed Chairman Jerome Powell expressing caution around lowering rates too quickly, in case inflation in “stickier” and more heavily-weighted service categories starts to follow suit.

But this was all before the latest U.S. jobs report was released, just two days after the Fed delivered its no-action decision. The data within suggested that the labor market may not be so resilient after all.

The rise in the unemployment rate to 4.2% in July wouldn’t itself be so alarming, nor would the downside miss in payrolls (which rose by 73,000, compared to expectations of 110,000). However, those pieces taken together with revisions to prior months’ data are cause for closer consideration: Updates to May and June job additions numbers suggest the economy added roughly 250,000 fewer jobs than originally thought, bringing the average of the past three months to just 35,000.

The labor market appears to be softening and given that the latest U.S. Gross Domestic Product (GDP) report showed that demand among domestic consumers and businesses continues to slow, it doesn’t seem likely that we will see a positive reacceleration in the pace of hiring between now and year-end.

Given that the Fed maintains that its policy rate is still being held at a slightly restrictive level, there’s an argument to be made that they have room to cut before their stance becomes conducive to a reacceleration of inflation. They have been communicating a view that the risks of inflation reaccelerating and growth slowing down more meaningfully have been fairly balanced, but the latest data may be tipping the scales towards a prioritization of labor market health.

July may not have been the right time to deliver a rate cut, but if labor market conditions continue to soften the right time could be soon. We expect the Fed to start making moves later this year, with an outlook for the Fed’s policy rate to be a full percentage point lower by this time next year.

All market and economic data as of 08/04/2025 are sourced from Bloomberg Finance L.P. and FactSet unless otherwise stated.

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