Fin-X Wealth Pulse 31st July 2025

The Federal Reserve decided to take more time to assess inflation before cutting rates, providing a moderately more hawkish outlook even though two dissenters called for cuts. Overall, financial conditions have eased since April. But the GDP report provided more evidence that economic growth is still slowing.

• The 1st estimate of US real GDP indicated that the economy grew at an annualised +3.0% pace in Q2, according to the Bureau of Economic Analysis, above consensus estimates of +2.6% and up from -0.5% in Q1.

• Nominal GDP grew at a +5.0% annualised pace (+4.8% expected).

• The BEA reported that "The increase [...] primarily reflected a decrease in imports, which are a subtraction in the calculation of GDP, and an increase in consumer spending. These movements were partly offset by decreases in investment and exports."

• Personal consumption contributed +1.0% to real GDP, growing at an annualised +1.4% (+1.5% expected), which was up from +0.5% in Q1 but significantly below the 10yr average of +3.0%.

• Imports contributed +5.2% to real GDP as they shrank by an annualised -30.3% after rising +37.9% in Q1. Imports had detracted -4.7% from real GDP in the first quarter.

• Gross private domestic investment contributed -3.1% after it contracted by an annualised -15.6%. This is down from +23.8% in Q1 when inventory stocking ahead of tariffs was prevalent. 

• 9 FOMC members voted to hold rates in the  4.25% - 4.50% range. Michelle Bowman and Christopher Waller dissented as expected, preferring to lower rates.

  
  

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  • The increase in GDP was flattered by the drop in imports. Excluding the noise, there are clear signs that domestic demand is softening, led by weaker consumer spending.

  • Given the recent passage of the tax changes and tariff negotiations, today's Fed statement contained a large amount of information on the Fed's thinking.

  • The Fed sees policy as only moderately restrictive. This is debatable. But financial conditions have eased since April 2nd when lower equity required returns, tighter credit spreads, and a weaker US dollar are taken into account.

  • Chair Powell stressed that inflation is further away from its target than the unemployment rate. He acknowledged that this is in part due to immigration controls reducing labour supply.

  • The low unemployment rate is the main reason why the Fed decided that it could take more time to wait and see regarding the tariff effects on inflation. The base case is still that tariffs represent a one-time price rise. But the majority of FOMC members still see upside risks to inflation.

  • The dissenters have expressed concern that the labour market is showing signs of cracking, a view that we share. Chair Powell highlighted that a broad range of labour market measures are at similar levels to a year ago. But our assessment of shorter-term data is that the direction of travel is weaker and more aligned with the dissenters.

  • Nevertheless, there is still broad consensus among FOMC members that rates are headed lower. As for the RBA, it's just a question of timing. The market is now only pricing a 43% chance of a September cut after this moderately hawkish meeting.

  • Lastly, Chair Powell said that it is not the job of the FOMC to consider the costs to the government of holding rates higher for longer.

    
    

    

    
    

    More information on Fed statement

• The opening two paragraphs of the Fed statement were modified, now stating "Although swings in net exports continue to affect the data, recent indicators suggest that growth of economic activity moderated in the first half of the year. The unemployment rate remains low, and labor market conditions remain solid. Inflation remains somewhat elevated. The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run. Uncertainty about the economic outlook remains elevated. The Committee is attentive to the risks to both sides of its dual mandate." [Changes underlined]

• Jerome Powell said, "Despite elevated uncertainty, the economy is in a solid position. The unemployment rate remains low, and the labor market is at or near maximum employment. Inflation has been running somewhat above our 2 percent longer-run objective [...] We believe that the current stance of monetary policy leaves us well positioned to respond in a timely way to potential economic developments [...] Recent indicators suggest that growth of economic activity has moderated. GDP rose at a 1.2 percent pace in the first half of the year, down from 2.5 percent last year. Although the increase in the second quarter was stronger at 3 percent, focusing on the first half of the year helps smooth through the volatility in the quarterly figures related to the unusual swings in net exports. The moderation in growth largely reflects a slowdown in consumer spending. In contrast, business investment in equipment and intangibles picked up from last year’s pace. Activity in the housing sector remains weak. In the labor market, conditions have remained solid. Payroll job gains averaged 150 thousand per month over the past three months. The unemployment rate, at 4.1 percent, remains low and has stayed in a narrow range over the past year. Wage growth has continued to moderate while still outpacing inflation. Overall, a wide set of indicators suggests that conditions in the labor market are broadly in balance and consistent with maximum employment. Inflation has eased significantly from its highs in mid-2022 but remains somewhat elevated relative to our 2 percent longer-run goal [...] These readings are little changed from the beginning of the year, although the underlying composition of price changes has shifted: services inflation has continued to ease, while increased tariffs are pushing up prices in some categories of goods. Near-term measures of inflation expectations have moved up, on balance, over the course of this year on news about tariffs, as reflected in both market-based and survey-based measures. Beyond the next year or so, however, most measures of longer-term expectations remain consistent with our 2 percent inflation goal."

• On the outlook, he added, "Changes to government policies continue to evolve, and their effects on the economy remain uncertain. Higher tariffs have begun to show through more clearly to prices of some goods, but their overall effects on economic activity and inflation remain to be seen. A reasonable base case is that the effects on inflation could be short-lived—reflecting a one-time shift in the price level. But it is also possible that the inflationary effects could instead be more persistent, and that is a risk to be assessed and managed [...] For the time being, we are well positioned to learn more about the likely course of the economy and the evolving balance of risks before adjusting our policy stance. We see our current policy stance as appropriate to guard against inflation risks. We are also attentive to risks on the employment side of our mandate. In coming months, we will receive a good amount of data that will help inform our assessment of the balance of risks and the appropriate setting of the federal funds rate."

• It was also announced last night that South Korean exports to the US will also attract a 15% tariff, aligning important auto export tariffs with those on the EU and Japan. Indian goods will attract a 25% tariff.

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