In June 2025, the Federal Reserve (FED) once again pressed the pause button, keeping the federal funds rate in the range of 4.25% - 4.50%. This marks the sixth consecutive time since December of last year that there has been no change.
Beneath the surface calm, there are undercurrents within the Federal Reserve (FED). The meeting minutes reveal significant disagreements among officials regarding the economic impact of tariff policies, and the debate over the timing of interest rate cuts has moved from behind the scenes to the forefront.
The Essence of Interest Rate Cuts: The Economic Adjustment Valve of the Central Bank
A rate cut is essentially the action of a central bank lowering the benchmark interest rate. When the economy faces downward pressure, the Federal Reserve (FED) lowers the federal funds rate, directly affecting the short-term borrowing costs between commercial banks.
This policy transmits to the real economy: the decrease in corporate loan costs stimulates investment, the lowered threshold for personal credit consumption, and the increase in money supply ultimately achieve the goal of boosting economic activity.
Among the tools in the monetary policy toolbox of The Federal Reserve (FED), open market operations (OMO) are the most critical. By buying and selling government securities in the open market, the FED can accurately adjust market liquidity and interest rates.
During the pandemic in 2020, the Federal Reserve (FED) lowered interest rates to near zero and injected massive liquidity into the market through quantitative easing. Now, in the face of a complex economic situation, cutting interest rates has once again become one of its policy options.
Policy Deadlock: The Federal Reserve’s Crossroads
The internal divisions within the Federal Reserve regarding the path to interest rate cuts are becoming increasingly public. Governor Waller and Vice Chair Bowman (both appointed during Trump’s first term) have publicly stated that they may consider interest rate cuts as early as the meeting on July 29-30.
But the opposing voices are equally strong. Chicago Federal Reserve President Goolsbee believes that a rate cut in July is "premature" and hopes to see milder inflation data before taking action. This divergence is reflected in the June dot plot: among the 19 policymakers, 9 believe that there should be no rate cut this year or only a 25 basis point cut, 8 support two 25 basis point cuts, and only 2 expect three cuts.
The Federal Reserve Chairman Jerome Powell is trying to find a balance amid the divisions. He stated at a congressional hearing that the "vast majority" of members expect a rate cut to be appropriate later this year, while emphasizing that policy decisions will adhere to the principle of "data-driven."
Key Variables: The Game of Triple Challenges
Three key factors influencing the Federal Reserve’s decisions are forming a complex game.
Tariff inflation has become the most pressing variable. The Trump administration announced a 25% tariff on major trading partners such as Japan and South Korea starting August 1. UBS estimates that if the new tariffs are implemented, the PCE price index favored by The Federal Reserve (FED) may rise to 3.4% by the end of the year, far exceeding the 2% target.
"High policy rates are not the appropriate tool to address this type of inflation problem," warned UBS chief U.S. economist Mark Zandi, "and may instead exacerbate an already weak labor market."
Conflicting signals in the job market. In June, non-farm employment increased by 147,000 jobs, exceeding expectations; however, ADP employment unexpectedly decreased by 33,000, marking the first negative growth since March 2023. Employment in the service sector fell by 66,000 jobs, experiencing the largest decline since the pandemic began.
The attractiveness of dollar assets is changing. Some dollar wealth management products have stopped profit-taking after reaching the annualized yield target of 4.2% ahead of schedule, such as a product from China Merchants Bank Wealth Management that was terminated just 7 months after its launch. Among the products currently available, there are still many performance benchmark products in the "4" range, with two products from Huihua Wealth Management having performance benchmarks as high as 5%-5.45%.
Global Changes: The Real Impact of De-Dollarization
The Federal Reserve (FED) must consider the structural changes in the international monetary system when making decisions. The percentage of the US dollar in global foreign exchange reserves decreased from 66% in the first quarter of 2015 to 57.8% by the end of 2024, a decline of 8.2 percentage points over eight years.
Emerging markets have shown a divergent response to The Federal Reserve (FED) policy. During the tightening cycle that began in March 2022, the dollar depreciated against currencies such as the Malaysian ringgit and the Mexican peso, but appreciated over 9% against the Brazilian real, Chilean peso, and South African rand, with an appreciation of more than 80% against the Turkish lira and Egyptian pound.
"The impact of the Federal Reserve’s monetary policy operations on the exchange rates of emerging market countries has changed significantly," the study found, "currencies in South America, Africa, and Turkey are performing weakly, while currencies in Asia and Europe are generally stable."
This differentiation stems from the improvement of economic governance capabilities in emerging markets and the diversification of foreign exchange reserves. Central banks in multiple countries have increased their holdings of assets such as gold and the renminbi, reducing their risk exposure to dollar-denominated assets.
Policy Outlook: The September Time Window
Market attention is focused on the September meeting. Goldman Sachs’ latest forecast predicts that the Federal Reserve (FED) will implement three 25 basis point rate cuts starting in September, significantly earlier than the previously predicted one in December.
Minneapolis Federal Reserve President Kashkari also supports this timeline: "Two rate cuts are still expected in 2025, with the first cut possibly occurring in September." Citigroup analysts noted, "The ‘wait-and-see period may end in late summer,’ which is consistent with Powell’s recent statements."
But the rate cut in September still faces uncertainties. If the tariffs are officially implemented on August 1 and drive up inflation, the Federal Reserve (FED) may be forced to pause its actions. "If the Federal Reserve (FED) cuts rates in September while the effects of the tariffs become apparent later, it may pause the rate cuts," Kashkari admitted.
Data in the coming weeks will be particularly crucial. Powell made it clear that the prerequisite for interest rate cuts is that "the price increases caused by tariffs do not show signs of persistent inflation," and that the economy can generate enough jobs to prevent the unemployment rate from rising too quickly.
