Fed July FOMC Minutes Highlight Inflation-Rate Dilemma, Market Rate Cut Expectations Cool Significantly

According to the July FOMC minutes released by the Federal Reserve on August 20, 2025, most policymakers lean towards keeping interest rates unchanged due to persistent inflation risks and signs of labor market weakness. The market’s earlier expectations for a possible September rate cut have notably cooled, According to the CME FedWatch tool, the market’s probability of a September rate cut has fallen below 80%, indicating a more cautious investor sentiment. Following the minutes release, US Treasury yields rose, the US dollar strengthened, and valuations of US tech stocks came under pressure. Overall risk appetite declined, reflecting market concerns over future economic uncertainties.

Key details and observations from the minutes include:

• The majority of members favored maintaining rates within the restrictive range to ensure inflation continues to fall toward the 2% target while avoiding overly rapid policy easing that could spur demand.
• Only two members supported immediate rate cuts, reflecting some concerns about economic slowdown but a predominantly cautious stance.
• Policymakers expressed uncertainty regarding Trump's tariff policies, worried about one-off price increases from tariffs and their ongoing impact on inflation and economic stability.
• Signs of labor market softness were noted but were not enough to shift the majority’s stance on rates.
• On the market side, technology stocks faced heavy selling, AI-related stocks cooled off, and capital shifted to more stable investments with secure cash flows.

In summary, the minutes reveal the Fed's dilemma between controlling inflation and supporting the economy, with policymakers awaiting more data before any action. Consequently, market rate cut expectations have been pushed back, strengthening the dollar and bond yields amid increased stock market volatility and cautious investor sentiment. Going forward, markets will closely watch the September FOMC meeting and forthcoming data, particularly inflation trends and employment conditions. Additionally, the recent substantial US tariff hikes from early August have heightened inflation concerns and pose a potential influence on future Fed monetary policy decisions.