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August 1, 2025 -- The Fed made no change to monetary policy at its July meeting this week, holding pat despite two voting members preferring to make a quarter-point reduction in the federal funds rate. The Fed remains cautiously on hold, awaiting greater clarity on the effects of new and greatly expanded tariffs on the trend for inflation. Today was technically the deadline for getting new trade arrangements in place, but deals are still being hashed out and likely will be for some time yet, even with frameworks in place with some trading partners.
The Fed has felt comfortable in waiting to lower rates as it appears that the economy is performing fairly, if perhaps a bit more sluggishly. The statement that closed Wednesday's FOMC meeting said "recent indicators suggest that growth of economic activity moderated in the first half of the year. The unemployment rate remains low, and labor market conditions remain solid. Inflation remains somewhat elevated."
During his post-meeting press conference, Fed Chair Powell characterized the present level of the federal funds rate as "modestly restrictive", and that the "economy is not performing as [if] a restrictive policy is holding it back." With regards as to whether or not a September rate cut will come, the Fed in coming months "will receive a good amount of data that will help inform our assessment [as to] the appropriate setting of the federal funds rate.", he said.
In his prepared remarks, Mr. Powell noted that "In the labor market, conditions have remained solid, Payroll job gains averaged 150 thousand per month over the past three months. The unemployment rate, at 4.1 percent, remains low and has stayed in a narrow range over the past year." All this was true until the July employment report was released on Friday morning, two days after the close of the meeting.
While forecasts for job growth were already meager at about 100,000 new hires expected, July's pace of hiring came in at only 73,000. Although a miss to the downside, the number wasn't especially soft, but there was no mistaking the weakness when June's original figure was revised down by 133,000 hires to just 14,000 and May's by 125,000 to only 19,000 jobs created. The average payroll gain over the three-month period to which Mr. Powell referred was revised down to just 64,000, a far weaker pace. If only the last three months are considered, this average figure is just 35,000.
To be fair, the previously-reported data did seen a little suspect, given all the uncertainty injected into the outlook when expansive tariffs were announced back in April. The downward revisions for May and June and a soft July number seem to now more clearly reflect that uncertainty, something the Fed's own regional surveys of economic conditions had previously noted. May's "Beige Book" reported that "Comments about uncertainty delaying hiring were widespread," and July's noted that "Hiring remained generally cautious, which many contacts attributed to ongoing economic and policy uncertainty."
Even before the latest figures were known, Mr. Powell said in answering a question that "You do see a slowing in job creation, but also a slowing in the supply of workers," while characterizing the labor market as "in balance." That said, he mentioned twice in the same answer that "downside risks to the labor market are certainly apparent." Queried as to what kind of job creation number might represent equilibrium in labor conditions, he offered this: "the main number you have to look at now is the unemployment rate."
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The July unemployment rate did edge higher by a tenth of a percentage point, to 4.2%, but this is still roughly the same level it has been at for more than a year. The size of the labor pool shrank for a third consecutive month, although the 38,000 who stepped out of the labor force was the fewest of the last three readings. However, it was enough to see the labor force participation rate decline again, with a 0.1% fall leaving it a 62.2%, the lowest it has been since November 2022. The employment report also said that wages rose by 0.3% last month, lifting the annual rate of increase back up to 3.9%, a still-healthy clip, and one that is producing "real" wage gains over inflation.
Before the Fed meeting, the June Job Openings and Labor Turnover Survey (JOLTS) might have provided a kind of a preview of the July employment report. After a hopeful upward bump in May, available positions declined by 275,000 in July, falling back to a 7.437 million level, almost exactly the average of the last three months. That said, hires also cooled notably, dropping 261,000 to 5.204 million, the lowest rate in a year. Separations also fell, as layoffs diminished modestly (-7,000 to 1.604 million) and voluntary quits dropped by 128,000 to 3.142 million. Few workers may be losing jobs or giving them up to pursue new avenues, but those who do are facing a tougher climate for getting a new gig; by our reckoning, the hires rate was the second slowest since August 2015 if the pandemic-shutdown months are discounted.
Announced layoffs kicked higher in July, according to the outplacement firm of Challenger, Gray and Christmas, totaling 62,075 for the month. This was up 29.3% compared to June and almost 140% higher than July 2024, but well below figures seen earlier this year. Layoffs were largely attributed to "Tech, AI and Tariffs" according to the report, with the majority of job reductions coming from government, IT positions and retail concerns. Even with more layoffs announced recently, the number of folks signing up for unemployment benefits continues to be low; in the week ending July 26, only 218,000 new applications for assistance were filed, nearly unchanged from the week prior and very close to the lowest levels since April. Continuing claims for benefits came in at 1.946 million, unchanged from a week prior and still at about a three-year high. These are likely the people most affected by the sluggish pace of hiring.
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Workers on the books cost their employers 0.9% more in the second quarter, according to the latest Employment Cost Index. This broad measure of the total cost of keeping an employee on the payroll showed that wages grew by a full 1 percent in the second quarter, up 0.2% from Q1, while costs for benefits dropped off by 0.5% to land at an increase of just 0.7% for the quarter. Over the last 12 months, there's a bit of symmetry to be seen, as overall compensation, wages and benefits have all risen by 3.6%. Overall compensation continues to cool, lessening any contribution to inflation.
As expected, economic growth rebounded in the second quarter, with GDP coming in at an annualized 2.97%, rather stronger than forecasters expected. Like the first quarter of 2025 the figures were distorted by trade; a surge in imports was the cause for a 0.5% decline in GDP for the first stanza of this year, and this reverted in the second quarter. Imports have a negative impact in the GDP calculation ,and exports a positive contribution, and imports surged by 2.59% to start the year, but have now posted a -3.17% figure in the most recent quarter. Exports dropped 4.61% in Q1, then increased by 4.99% in the second. Balancing it out, the economy grew at a modest 1.2% pace in the first half of the year, about half the rate for the same period a year ago. Price pressures were better behaved this quarter, too, as the PCE measure for the last three months rose by just 2.1% (it was 3.7%) while core PCE rose 2.5% (3.5% in the first quarter). This being the case, and absent the uncertainty injected by tariffs and trade policy, the Fed would likely have trimmed rates this past week.
On the topic of prices, the June updates for PCE were released this week, and the Fed's favorite measure of inflation did show an uptick at the end of the quarter. Overall PCE rose by 0.3%, up a tenth of a percentage point from May, lifting the annual rate of the top-line PCE figure to 2.6% from 2.4% in May and up to its highest rate since February. Service costs remained at a 0.2% increase for a fourth consecutive month and seem to have settled into a mellow pattern, but goods prices -- likely reflective of tariffs -- rose by 0.4%, their biggest jump since January. Excluding the most volatile elements, core PCE also rose by 0.3%, keeping the annual rate at 2.8% for a second straight month, and still a fair bit away from the Fed's 2% core PCE goal.
Overall personal incomes rose by 0.3% in June, rebounding after a May dip. Wages expanded by just 0.1% to close the first quarter, the smallest gain in a year. Other supports were mixed, as proprietor's incomes rose by 0.2%, increasing again after a decline in May and government transfer payments rose by a full one percentage point. However, receipts on investment assets were flat for the month, and income derived from rental properties fell by 0.4%, a third consecutive fall. All of the overall increase in income was spent in June, as personal spending rose by 0.3%. Equal income and outgo left the nation's rate of savings at a 4.5% rate, unchanged from May and an average pace for the year as a whole so far.
Those savings don't appear as though they are going to be used for a down payment on a home anytime soon. An already sluggish pace of sales in the existing home market seems poised to slow a bit more when the summer buying period comes to a close, given that the National Association of Realtors Pending Home Sales Index fell by 0.8% in June, likely portending fewer closings in August. Given the typical two-month lag from contract to closing table, May's 1.8% bump in the PHSI should translate into July sales (released in August) at perhaps a 4.01 million pace, and following this logic, June's PHSI decline would put August sales (September release) back to perhaps a 3.97 million pace. Whatever the actual level, suffice it to say that existing home sales don't seem poised for a breakout anytime very soon.
Outlays for new construction projects shrank in June by 0.4%, matching a like-sized decline in May and are now down by 2.9% over the last year. Residential project spending declined by 0.7%, a sixth consecutive reduction, and homebuilding continues to face headwinds. Non-residential projects aren't faring much better, posting a 0.3% decline in the most recent month and this segment has been unchanged or down in each of the last five months. Public-works projects did manage a 0.1% increase for the month, as roads, bridges and utility upgrades continue along.
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Manufacturing activity remains muted. The Institute for Supply Management's barometer was expected to show a slight increase for July, but a small decline was seen instead. The reading of 48 for last month was down a point from June, continuing a modestly sub-par string of readings after two modestly above-par values to start the year. Those early-year positive readings broke a 26-month string of underwater values for this index, so it's not as though the present five-month string of sub-50 readings is all that unusual or concerning. For July, the gauge covering new orders edged upward, sporting a 0.7 point rise to 47.1, still short of breakeven by 2.9 points. However, the employment measure worsened, sliding 1.6 points to 43.4, a soft figure and the lowest since last July. Prices paid did manage to slip a little; reflective of inflation, this figure settled by 4.9 points to 64.8, but this continues a string of elevated figures that began back in February, when rumblings regarding tariffs began to lift input prices.
Consumer moods improved modestly in July. As measured by the Conference Board, Consumer Confidence rose by 2 points to a value of 97.2 for the month. While hardly robust, it is at least somewhat better than was seen when the "Liberation Day" tariffs were announced back in April. Current conditions were assessed to be somewhat less favorable, though, as this component declined by 1.5 points to 131.5, just barely above April's recent low. Expectations for times to come were a bit brighter, as a 4.5-point rise in optimism lifted this measure to 74.4, highest since February. Inflation expectations eased slightly, to an expected 5.8% increase in prices, down from 5.9% in June and moving away from the alarming 7% forecast in April. Plans to buy high-ticket items such as homes and cars both retreated for the month,
The University of Michigan's survey of Consumer Sentiment also pointed slightly higher for July. The one-point increase in this measure to 61.7 didn't change the overall picture for consumer moods, but it too was a small positive step away from truly dark readings in April and May. The assessment of current conditions moved higher with a 3.2-point rise to 68, best since January, while the outlook portion dimmed a little, shedding 0.4 points to slide to 57.7, still a relative improvement compared to values seen during the spring. Inflation expectations measured here also moderated; the one-year forecast was 4.5%, lowest since February (and 2.1 percentage points below May) while the five-year outlook for prices slipped to 3.4% down 0.6% and rather closer to the pre-tariff-announcement longer-term trend.
Current Adjustable Rate Mortgage (ARM) Indexes
| Index | For The Week Ending | Year Ago | |
|---|---|---|---|
| Jul 25 | Jun 27 | Jul 26 | |
| 6-Mo. TCM | 4.31% | 4.27% | 5.20% |
| 1-Yr. TCM | 4.08% | 3.98% | 4.83% |
| 3-Yr. TCM | 3.83% | 3.74% | 4.25% |
| 10-Yr. TCM | 4.39% | 4.30% | 4.25% |
| Federal Cost of Funds |
3.677% | 3.662% | 3.969% |
| 30-day SOFR (daily value) | 4.34967% | 4.31091% | 5.33808% |
| Moving Treasury Average (MTA/12-MAT) |
4.221% | 4.308% | 5.163% |
| Freddie Mac 30-yr FRM |
6.74% | 6.67% | 6.73% |
| Historical ARM Index Data | |||
There were fewer requests for mortgage credit in the week ending July 25. The Mortgage Bankers Association reported a 3.8% decline in mortgage applications, with the overall figure pulled downward by a 5.8% drop in requests for purchase-money loans and a 1.1% decline in those to refinance existing mortgages. With mortgage rates mostly level of late but likely to decline somewhat after the July employment report, we'd expect to see a bounce in applications to start August. This would help continue a pattern of starting each month with an increase, as has been the case for some months now.
While the Fed has been in no hurry to trim interest rates, the softening pace of hiring and considerable revisions to earlier months likely means that a rate cut will be coming soon, although not soon enough for at least some parties, both at the Fed and elsewhere. Arguably, one would have come this week absent the tariff upheaval, and even with it the case for a cut this week would have been strengthened if the employment revisions had come in advance of this week's meeting rather than after it. Still, a slack pace of hiring due to an uncertain business climate alone isn't enough to make it a "slam dunk" that a rate cut is due, or even overdue. Mr. Powell's words to pay close attention to the unemployment rate is likely the key element to consider now, and at least through July, the 4.2% unemployment rate is a very solid number and one that is little changed since more than a year ago.
What is already here -- and will be coming soon, too -- is more bashing of the Fed by the administration and the president, who has no one else but himself to blame for the Fed being on hold for longer. On the topic of blame, the president seems to have fired the commissioner of the Bureau of Labor Statistics after he didn't like the hiring numbers reported today. Shooting the messenger doesn't change the situation, though, where uncertainty regarding the direction for the economy, inflation and labor conditions remains the order of the day, impacting consumer moods, business activity and monetary policy alike.
Expectations for the Fed to cut rates moved sharply higher after the employment report. Pre-meeting, federal funds future contracts as tracked by the CME Fedwatch tool suggested a 64% chance of a quarter-point cut in September; post-meeting this fell to about 45%. After the July employment report? Nearly 90%. Will a rate cut be coming soon? Odds do favor it, but there's a lot of data due out over the next six weeks that may change things, especially if the unemployment rate doesn't increase and inflation does.
Coming very soon -- next week, in fact -- will be a decline in mortgage rates. A selloff in stocks, a rally in bonds and a light calendar of economic data over the coming days should allow them to retreat a bit. Based on the trend for the week and Friday's market activity, we think that we'll see a 5-7 basis point decline in the average offered rate for a conforming 30-year fixed-rate mortgage as reported by Freddie Mac next Thursday.
Spring has given way to the lazy days of summer, but what's the outlook for mortgage rates between now and September? Check out our latest Two-Month Forecast for mortgage rates covering July and August.
See our 2025 Mortgage and Housing Market Outlook, covering mortgage rates, housing conditions, the Fed and lots more. Our mid-year review of our expectations is coming next week.
Also, for a really long-run outlook, you'll want to review "Federal Reserve Policy and Mortgage Rate Cycles".
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