After a quarter of contraction and political pressure mounting, the U.S. economy's surprise second-quarter growth and a sharp rebound in private jobs in July have weakened the case for a September rate cut, leaving Fed Chair Jerome Powell in the hot seat ahead of Wednesday’s pivotal policy decision.
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The 3% annualized GDP growth for the second quarter—well above the 2.4% forecast—came as a surprise to many. Combined with a strong bounce in July’s private payrolls, the data sent rate cut bets tumbling.
According to CME Group's FedWatch tool, traders now see a 58% chance of a September cut, down from 65% just a day ago, and way off the 95% odds priced in a month earlier.
Trade Payback Powers Q2 Rebound, July’s Labor Market Shows Strength
Much of the GDP rebound came down to a big drop in imports, which fell 30.3% last quarter. That followed a front-loaded import surge in Q1, when companies rushed to get ahead of new tariffs announced by the Trump administration.
Since imports subtract from GDP calculations, their collapse gave Q2 figures a notable boost, though it doesn't necessarily reflect a sudden jump in domestic demand.
Second-quarter growth was driven largely by a sharp reversal in trade dynamics. Imports plunged 30.3%, following a 37.9% surge in the first quarter as businesses raced to stockpile foreign goods ahead of the Trump administration's new tariffs. Because imports are subtracted in GDP calculations, the drop provided a statistical lift to output.
Meanwhile, private-sector labor data for July showed unexpected strength, offering an early signal ahead of Friday's official jobs report.
ADP said U.S. private employers added 104,000 jobs in July, bouncing back from a 23,000 contraction in June and topping expectations for a 74,000 increase.
"Hiring and pay data are broadly indicative of a healthy economy," said Nela Richardson, chief economist at ADP. "Employers have grown more optimistic that consumers, the backbone of the economy, will remain resilient."
September Cut Now At Risk
The combination of GDP and jobs strength is forcing economists to reevaluate the case for imminent rate relief.
"The US economy rebounded solidly in the second quarter, shaking off the mild Q1 contraction that was almost entirely due to an exceptional surge in imports," said Matthew Ryan, head of market strategy at Ebury.
"We expect Chair Powell to talk up this economic resilience and steer clear of signaling a September cut, which now appears very much in doubt."
"Given the solid growth data, steadily rebounding consumption and early signs that tariffs are beginning to feed into inflation, the Fed will be even less inclined to cut rates soon. This is likely to pile on tensions between President Trump and Chair Powell," said Nathaniel Casey, investment strategist at Evelyn Partners.
Not everyone sees the data as a reason to rule out a September rate cut.
Jamie Cox, managing partner of Harris Financial Group called the GDP beat "great, just not that great," noting that the second quarter was largely a rebound from Q1 distortions.
Jeffrey Roach, Chief Economist at LPL Financial, said: "Investors should focus on the deceleration in consumer spending. With delinquencies rising for upper-income consumers, we expect spending to moderate. The Fed should still be in a good place to cut by September."
All Eyes On Powell
Markets now turn to Powell's press conference later Wednesday, where analysts expect the Fed Chair to acknowledge the economic strength but avoid firm guidance for future moves.
"There is significant interest in how Powell will frame recent developments," economist Mohamed El-Erian posted on X.
"This meeting risks being a lose-lose scenario for the institution."
A week ago, El-Erian suggested that Powell should resign to protect the central bank's independence.
"If Chair Powell's objective is to safeguard the Fed's operational autonomy (which I deem vital), then he should resign," El-Erian wrote on July 22.
His comments came amid mounting criticism and intensifying pressure from the Trump administration, which has repeatedly urged Powell to cut interest rates.
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