Fed Holds Rates Steady, Markets Reassess Expectations for Rate Cuts

On July 31, 2025, the U.S. Federal Reserve kept interest rates unchanged at 4.25%–4.50%, signaling a cautious stance amid persistent inflation and political pressure. The central bank emphasized the need for more economic data before considering any potential rate cuts, prompting investors to scale back their expectations for near-term monetary easing.

Market pricing for a September rate cut dropped sharply—from 65% to just 46%—according to CME’s FedWatch tool. In response, U.S. Treasury yields edged higher, and the U.S. dollar strengthened against major currencies as traders adjusted to the Fed’s more patient tone.

Equity markets were mixed. Small-cap stocks came under pressure due to expectations of prolonged higher interest rates, while defensive sectors and export-oriented firms benefited from the stronger dollar.

Analysts noted that the Fed remains focused on curbing inflation, resisting calls for looser policy despite softening in some labor market indicators and growing political pressure from President Donald Trump, who has openly criticized Chair Jerome Powell.

With inflation metrics such as CPI and PCE still hovering above the Fed’s 2% target, markets now expect the first rate cut to be delayed until late 2025, unless inflation data shows a clear downward trend.

Looking ahead, investors will closely monitor upcoming inflation reports and Fed communications for clearer signals on policy direction heading into Q4 2025.