Weekly Update 07/11/2025: Fed Minutes Show Emerging Divide
Labor Market
The Labor Department reported that initial jobless claims for the week ending July 5 fell by 5,000 to 227,000. The median forecast in a survey of economists conducted by Bloomberg called for 235,000 applications so, once again, the job market surprises to the upside. Nevertheless, continuing claims, rose to 1.97 million in the week ending June 28, expressing some of the highest numbers for that metric since late 2021. That figure was inline with the median forecast. Some of the reason for the drop in initial claims could be for school summer breaks and federal holidays (July 4). Also, summer is when a lot of the auto manufacturers retool their productions lines as they get ready to roll out their 2026 models. The main takeaway is that rising continuing claims coupled with an increasing duration of unemployment suggest the labor market may be cooling. The average duration of unemployment is 23 weeks which is when many states cut off unemployment insurance. If those individuals simply drop out of the labor force, it will mask the true depth of underemployment so it is a trend worth watching.
Fed Machinations
Minutes of the June 17-18 policy meeting showed that there were definitely two camps forming in the Federal Open Market Committee Meeting (FOMC)—one in favor of rate cuts and one set against any change. “While a few participants noted that tariffs would lead to a one-time increase in prices and would not affect longer-term inflation expectations, most participants noted the risk that tariffs could have more persistent effects on inflation,” the minutes revealed. Ten of the 19 officials (not all officials vote as part of the FOMC, but they all submit projections) showed their rate forecasts predicted at least two rate cuts by the end of the year. Seven officials projected no cuts and two projected one cut. The ever-changing nature of tariffs contributed to uncertainty about inflation, the minutes showed. “Participants judged that uncertainty about the outlook was elevated amid evolving developments in trade policy, other government policies, and geopolitical risks, but that overall uncertainty had diminished since the previous meeting,” the minutes said. Fed Chairman Jerome Powell has previously commented that the Fed would have likely lowered rates by now if not for tariffs. The issue is that economic data, so far, has not shown a considerable effect from the tariffs that have been implemented. That leaves open the debate of when and for how long any tariffs either levied or yet to be imposed will ultimately increase prices.
Markets are not betting on cuts anytime soon. The futures markets predicted a 7% chance of a rate reduction at the July 29-30 FOMC meeting. Those odds balloon to over two thirds by the September meeting which is far enough in the future to encompass the end of any current 90-day pauses on levies. The market is estimating that by then traders will have some sort of certainty. The minutes showed that most policymakers assessed that “some reduction” in the benchmark rate will happen at some point this year. But officials do not see a need to rush given solid economic trends and relatively low unemployment. “Participants agreed that although uncertainty about inflation and the economic outlook had decreased, it remained appropriate to take a careful approach in adjusting monetary policy,” the minutes said. One large national retailer commented that prices being charged in May reflect inventories purchased in February, before any change in tariffs took effect. July and August data will be much more affected by changes since April.
Recent press articles show that more volatility may be on the way if President Trump decides to name a replacement for Chair Powell early. Powell’s official term ends in May of next year, but the president’s desire to lower rates has stirred talk of at least presenting a candidate who will follow that path. That may confuse traders if the candidate is campaigning for one path while the actual chair and voting body are doing something different. Inflation is not only about the change in prices but the anticipation of a change in prices. The Fed’s post-pandemic goal is to stop the cycle where the threat of higher prices tends to lead to higher prices. A pricing spiral that feeds on itself would harken back to the decade of the 1970s when inflation was regularly high and nominal interest rates in the double digits. That is not the reality the Fed wants to create and would certainly be a crippling blow to the psyche of many American workers whose confidence has been shaken over the past several months.
Is a patient approach better? The risk of making no change is that investment in capital and people is being suffocated by rates which are too high, thus creating an artificial lid on growth. The argument makes sense if rates are the one and only thing curtailing progress. In that case, the solution is simple: start cutting rates! But as we have outlined in these weekly missives and our quarterly commentaries, the Fed is surprisingly powerless to stop a real recession should it be in effect. The Fed does not control fiscal policy (taxes, trade policy) and it ultimately has no say over who and how many are hired or fired (corporate strategy and policy). It cannot forgive loans or wipe out private debt and has no judicial authority. Recessions are a confluence of events that overlap to varying degrees causing a decline in general output. We dig more into this in the latest quarterly commentary so be sure to peruse that document. Suffice it to say, while the Fed can contribute meaningfully to the duration of any expansion or slowdown, it is extremely rare when it is the sole cause of changing economic cycles. The reactive function of the body also argues that the Fed is reacting to whatever processes are already in motion rather than the start of the wave.
Company Events
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