Powell staying the course

Unsurprisingly, the Fed has decided to keep its key rates unchanged, resisting growing pressure from Donald Trump, who has been calling for lower borrowing costs for several months. The decision, adopted by nine votes to two, keeps the target range for the federal funds rate at 4.25% to 4.50% for the fifth consecutive meeting.

While status quo was expected, Jerome Powell dampened the hopes of investors who were mostly betting on a rate cut in September: "We have not made any decisions regarding September." The Fed therefore prefers to wait for additional data, without being entirely convinced that the two months between now and the next meeting will provide the necessary degree of confidence.

On the CME's FedWatch tool, the probability of a rate cut in September has thus fallen below 50%. The dollar strengthened by 0.96% against a basket of reference currencies, reaching its highest level in two months during trading, while bond yields rose by several basis points. The main Wall Street stock indices reversed their trend to end the day lower.

Nevertheless, the Fed still considers its current policy to be "moderately restrictive," which is justified by fundamentals: "inflation is slightly above target, maximum employment has been achieved."

"A pretty good meeting"

Significantly, this meeting is the first since 1993 in which two members of the seven-person board of governors voted against the majority decision. Michelle Bowman, vice chair for supervision, and Christopher Waller expressed their preference for an immediate 25bp cut.

When asked several times about his colleagues' dissent, Jerome Powell sought to downplay its significance. "What you expect from everyone, including a dissenter, is a clear explanation of your thinking and your arguments. And that's what we had today. So I think it was a pretty good meeting for all of us." If Jerome Powell were the coach of the French national soccer team, he would tell us that "the team is doing well."

Sources: St. Louis Fed, Bank of America

Dissenting FOMC members often release statements explaining their votes on the Friday following Fed meetings. But we already know what's behind this opposition.

Fundamentally, Waller and Bowman are more concerned than the rest of the FOMC (the monetary policy committee) about the slowdown in the US economy. They are arguing for an immediate rate cut because they believe that tariffs will be a temporary shock and will not lead to a resurgence of inflation in the long term.

Tactically, these two governors are also trying to position themselves in the race to succeed Jerome Powell by adopting positions close to those of the White House.

The White House has been putting pressure on Jerome Powell for months, arguing that high interest rates are costing the US "a fortune." In response to this criticism, the Fed chairman reiterated that the Fed has a dual mandate (maximum employment and price stability) but that the US government's borrowing costs are not one of its objectives.

The Fed is now waiting to see the impact of tariffs on the data before considering any further adjustments. And Jerome Powell's comments last night suggest that we won't have complete clarity in September: "I think we've learned that the process is likely to be slower than we initially expected. And we think we have a long way to go before we really understand how this will play out."