Fed extends pause
The Federal Reserve left its benchmark fed funds rate unchanged in a target range of 4.25%-4.5%, its fifth-consecutive pause since issuing three rate cuts late last year:
Source (data): Federal Reserve. Values represent upper end of Fed funds target range. (For illustrative purposes. Not a recommendation.)
However, some board members dissented, calling for an immediate rate cut. For the past few months, the Fed has been on hold because of concerns that lowering rates could exacerbate the inflationary risk posed by tariffs. With the labor market slowing but remaining on solid ground, the Fed claimed it was in a good position to wait and see how tariffs impacted the economy.
While economic growth has slowed and inflation in some core goods has increased, tariffs have, so far, not had the impact some economists forecasted. However, there is still concern that the greatest effects of tariffs are still to come, and the Fed repeatedly cited this uncertainty as it left interest rates unchanged—despite an aggressive White House campaign to compel it to do so. Morgan Stanley & Co. economists’ baseline outlook remains one of slow economic growth and firm inflation, with the strongest inflation push from tariffs possibly coming in August.1
The committe may be gaining consensus to cut rates before the end of the year, possibly at its next meeting.
Recently announced trade deals with Japan and the European Union may have reduced trade uncertainty, but they may also be introducing potentially inflationary tariff levels. Both agreements featured tariffs that were well above pre-Trump administration levels, although not as high as the ones that were originally proposed in April.
Ellen Zentner, Chief Economic Strategist for Morgan Stanley Wealth Management, believes the minutes of this meeting (which will be released in three weeks) could reveal the Fed’s discussion focused on evidence of a weakening labor market, and that the committee is gaining consensus to cut rates before the end of the year, possibly at its next meeting. Morgan Stanley & Co. economists still expect the next rate cut to occur in 2026, although they acknowledge there’s a possible path for the Fed to cut this year.2
Note: The Fed’s next policy meeting is scheduled for September 16-17.
1 MorganStanley.com. US outlook update: Still weighted to the downside. 7/16/25.
2 MorganStanley.com. Paths to September Rate Cuts. 7/28/25.