Mixed Economic Signals Emerge as Fed Pauses on Rates While Tariffs Rise

Matthew Rubin Chief Investment Officer

 

1. The Federal Reserve held interest rates steady but signaled a potential shift later this year, depending on inflation and labor trends.
2. U.S. job growth slowed in July amid rising unemployment, shifting labor supply, and fueling debate about the economy’s underlying strength.
3. The U.S. enacted broad tariff hikes last week, affecting key trade partners and regional blocs, while some countries secured temporary exemptions or deals.

 

1. Fed Holds Interest Rates Steady

The Federal Reserve kept interest rates unchanged at 4.25%–4.50% during its July meeting, in line with market expectations.¹ Chair Jerome Powell said current policy is moderately restrictive and that the Fed will continue to monitor the impact of tariffs on the economy. The Fed expects tariffs to cause a one-time increase in prices, with inflation easing afterward.¹ Still, Powell noted that if inflation stays contained and labor data weakens, a rate cut this fall could be on the table.¹ More details may emerge at the Fed’s Jackson Hole conference in late August. Investors now expect one or two cuts by the end of 2025, with additional reductions likely in 2026 as the Fed aims for a neutral interest rate level near 3%–3.5%.¹

2. Economic Uncertainty Amid Mixed Labor Market Signals

U.S. job growth slowed in July, with only 73,000 jobs added, well below the expected 100,000.² The unemployment rate rose slightly to 4.2%, pointing to a softening labor market.² However, economists remain divided about the health of the economy. While some see steady indicators and strong consumer confidence, others note rising price sensitivity and reduced spending, especially among younger consumers. The labor supply is also shifting: Immigration has slowed, and more Americans are retiring. As a result, the number of jobs needed to maintain stability has declined, reducing concerns about slower job growth. Uncertainty regarding the future implications of tariff policies may continue to fuel volatility, as demonstrated by Friday’s trading activity.

3. Tariff Increases Take Effect as U.S. Trade Policy Tightens

Last week, the Trump Administration confirmed it would raise tariffs on dozens of countries beginning August 7th, following an executive order signed last Thursday.³ Originally set for August 1st, the new date allows time for Customs and Border Protection to adjust the Harmonized Tariff Schedule. The action marks a significant escalation in U.S. trade policy, with a 15% tariff applied to major partners such as the EU, Japan, and South Korea, while nations with U.S. trade surpluses faced 10% tariffs.³ Some Southeast Asian countries, including Indonesia and Vietnam, saw rates rise as high as 20%, and tariffs on India and Canada increased to 25% and 35%, respectively.³ Mexico has received a 90-day extension. Uncertainty remains about sector-specific duties, especially on European steel and aluminum.

For the period ending 8/1/25.
* Small-cap stocks are represented by the Russell 2000^® Index. International stocks are represented by the MSCI EAFE. Bonds are represented by the Bloomberg US Aggregate Bond Index. Oil is represented by WTI Oil (West Texas Intermediate Oil), a benchmark for light, sweet crude oil and a primary measure for pricing oil contracts and futures in the U.S.

Sources
¹ CBS
² FactSet
³ WSJ

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