The Fed Held Rates Steady. The Central Bank’s Next Move Looks Murky.

The Fed held rates steady on Wednesday. (Andrew Harnik/Getty Images)

In a widely-expected move, the Federal Reserve held interest rates steady on Wednesday, but Chair Jerome Powell’s refusal to signal imminent cuts sent markets tumbling—and cast serious doubt on whether policymakers will ease in September.

After the Federal Open Market Committee wrapped its two-day July meeting and released its decision, Powell offered no clear road map during a press conference, telling reporters that the committee has made “no decisions” about future policy. His noncommittal stance rattled investors that had been pricing in a quarter percentage point cut next month.

The CME FedWatch tool showed September cut odds plunging to 45% from 63% the day before. Stocks surrendered early gains, with the S&P 500 closing down 0.1% and the Dow Jones Industrial Average dropping 0.4%, or 172 points. Treasury yields rose and the dollar strengthened.

The Fed chair said that policymakers remain laser-focused on incoming data, with two inflation reports and two jobs resorts due before the next FOMC meeting in mid-September. That information will help determine whether the central bank’s dual mandate—maximum employment and stable prices—remains in conflict, or is starting to align.

The Fed’s statement acknowledged that inflation remains stubbornly above target. The core personal consumption expenditures price index, the Fed’s preferred inflation gauge, is currently running at 2.7% annually.

Powell warned that tariffs have begun pushing up prices in some categories, though he stressed the committee’s base case assumes those effects will prove temporary. “It’s still quite early,” he said, “We’re just going to have to watch and learn empirically…the process will probably be slower than expected at the beginning.”

Powell described the Fed’s dilemma in stark terms—move too early and risk an inflation resurgence, or move too late and potentially damage the labor market. Current policy, he said, is “modestly restrictive.” But elevated interest rates haven’t yet constrained the economy, he added, pointing to robust consumer spending and a 4.1% unemployment rate.

Cracks are starting to show. Job creation is slowing alongside labor force growth, declines that could mask emerging weakness. Powell said on Wednesday that the unemployment rate, not payroll growth, will be the critical metric heading into September.

Wednesday’s decision wasn’t unanimous and marked a rare display of division. Two Fed governors—Christopher Waller and vice chair for supervision Michelle Bowman—dissented in favor of cutting rates. That marks the first time since 1993 that two governors opposed a policy decision.

Powell called the debate among policymakers “constructive” and said that “good arguments” were made. He went as far as to call it “one of the better meetings.” Still, he acknowledged that the dissent reflected genuine disagreement about inflation risk.

While most committee members agreed inflation remains too elevated for easing, Powell said the discussion highlighted how “two-sided” the risks have become. “The economy is in good shape, but it’s an unusual situation where you have risks to both your employment mandate and your inflation mandate,” he said.

Economists and analysts remain split on the Fed’s next move.

“September is certainly possible, but with inflation likely to be pushed higher by tariffs over the next few months, we are unlikely to get confirmation of more benign month-on-month inflation prints until the October and November reports,” wrote James Knightley, chief international economist at ING. “Obviously, this comes after the September FOMC and October FOMC meetings so if inflation is still hot we would need to see significant weakness in jobs to trigger a rate cut by then.”

Others see confirmation that the Fed isn’t ready to pivot just yet. The “market takeaway is that Powell sounds hawkish,” said Greg Halter of Carnegie Investment Counsel.

“The expectation for this meeting wasn’t a rate cut, and I don’t think there would have been much upside to Powell signaling that one was imminent,” said Elyse Ausenbaugh, head of investment strategy at J.P. Morgan Wealth Management. “The data, as it stands today, isn’t yet calling for one, and a lot could change between now and the FOMC’s next decision point in September.”

Whether coming data will provide the clarity Powell seeks before September remains uncertain. For now, the path to rate cuts just got considerably murkier.

Write to Nicole Goodkind at nicole.goodkind@barrons.com