This week's Federal Reserve meeting comes amid major economic reports on second-quarter GDP growth, June inflation and July job growth. But the most pivotal data point may already be out — the 15% U.S. tariff rate agreed to by the European Union over the weekend — setting the stage for a more dovish Fed tone on Wednesday.
Fed Chairman Jerome Powell turned more hawkish following President Donald Trump's April 2 "Liberation Day" reciprocal tariff announcement, and remained so after much of those tariff hikes were paused. He confirmed in a July 1 appearance that the Fed would have already cut this year if not for Trump tariffs.
Yet now that the actual level of Trump tariffs announced in a series of deals with the EU, Japan and others has assuaged concerns about a more pronounced jump in inflation, Powell may be ready to let down his guard somewhat.
U.S.-EU Trade Deal
Trump had threatened to hike broad-based tariffs on EU imports to 50% in May. On July 12, he warned that he would impose a 30% tariff on EU imports if there was no deal by Aug. 1. Pantheon Macroeconomics has written that each 10% increase in reciprocal tariffs on the EU would add 0.1% to the inflation rate, assuming no change to Trump's industry-specific tariffs targeting autos, steel and more.
The upshot is that the 15% tariff rate — up five percentage points from the rate that took effect in April — will add little to inflation. While the broad-based increase in the tariff rate will cover a bit more than half of imports from the EU, Trump agreed to lower the current 25% rate on auto imports to 15%. Meanwhile, aircraft and related parts will be spared from tariffs.
The EU also agreed to $750 billion in spending on energy exports from the U.S., boosting purchases by an estimated $150 billion a year vs. current levels, while European companies would raise investment levels in the U.S. by a cumulative $600 billion over the next four years.
Fed Meeting Expectations
As Trump grows increasingly impatient for the Fed to resume rate cuts, economists expect that a couple of voting members on the Fed's Federal Open Market Committee (FOMC) will register their dissent from the near-certain decision to hold rates steady. Deutsche Bank economists note that it would be the first time since 1993 that there was more than one dissenting vote.
Markets are pricing in less than 3% odds of a rate cut on Wednesday, according to CME Group's FedWatch tool. But rate-cut odds jump to 62% for the Sept. 17 meeting. By then, the Fed will have July and August inflation data in hand, as well as July and August jobs data.
"Powell is unlikely to remove a September rate cut from consideration nor intentionally raise the probability of that outcome," Deutsche Bank economists wrote.
Friday's Jobs Report
Economists expect the July jobs report to show that employers added a modest 102,000 jobs this month, including 94,000 in the private sector.
The unemployment rate is seen ticking back up to 4.2%.
A stronger-than-expected report would raise questions about whether the Fed needs to cut and dampen odds of a September rate cut.
Busy Economic Calendar
Other key economic reports this week include GDP for Q2, out Wednesday at 8:30 a.m. ET. Wall Street expects 2.5% growth as the economy bounces back from a 0.5% contraction in Q1. However, the underlying story is much less volatile. A surge in imports depressed headline GDP growth in Q1 and a correction will provide an extra boost in Q2, even as consumption turned softer.
The Fed's primary inflation gauge, the core personal consumption expenditures (PCE) price index, is out Thursday at 8:30 a.m. The core PCE price index is expected to rise 0.3% for June, keeping the 12-month core inflation rate at 2.7%. While tariffs have clearly boosted goods prices, that's mostly been offset by moderating prices for services such as air travel and accommodations.
The Employment Cost Index, the Fed's primary measure of wage growth, also out Thursday at 8:30, is seen moderating to a 0.8% quarterly gain, down from 0.9% in Q1.
Trump Tariffs, Tax Cuts Impact
The other big change since the Fed last met in mid-June is that Trump has signed the One Big Beautiful Bill Act into law. Approval of the tax and spending changes along with the recent spate of tariff deals has largely erased the policy uncertainty that Powell had compared to "driving on a foggy night" and cited as a reason for the Fed to "slow down" after a series of rate cuts last year.
Yet there's still uncertainty over the near-term economic outlook. Consumer spending has been sluggish and could remain so for a while, even if the latest batch of tariff increases are less than feared. Likewise, business investment and hiring has been soft, though DOGE job cuts haven't been fully felt. Yet the ongoing S&P 500 bull market rally, a moderate fiscal boost from the tax bill that includes investment incentives, and a resolution of tariff fears could lead to stronger growth.
