By Stephen Zeuthen, Alonso Munoz
When we wrote about the Fed almost exactly two years ago, we observed that Chair Jerome Powell had always been “consistent in being data reliant.” But now, during an unprecedented era of American exceptionalism, the Fed is stumbling over its own principles, looking into a crystal ball to determine rates rather than responding to the cold, hard facts. The American economy needs The Fed to cut the federal funds rate, and the American people deserve it.
Although the labor market has remained tight, the emerging signs of weakness are becoming hard to ignore (even the “experts” are touting a weakening labor market). As noted by Governor Christopher Waller, private payroll trends are alarming, as June’s ADP report showed a decline of 33,000 jobs, marking the first decrease in over two years.[1] The downward trend is supported by continuing claims data that came in higher than expected in June and rose to levels similar to November 2021, indicating that unemployed workers are struggling to find new jobs.[2]
A logical, data-dependent Fed would provide relief now, before the cracks of the labor market reach the surface. We believe the downside risk to the labor market presents a stronger risk than the not yet materialized tariff related spike in inflation.
June & July Continuing Claims Data [3]
| Week | Date Released | Estimate | Actual |
| June 7 | 6/18 | 1,941k | 1,945k |
| June 14 | 6/26 | 1,950k | 1,974k |
| June 21 | 7/3 | 1,962k | 1,964k |
| June 28 | 7/10 | 1,965k | 1,965k |
| July 5 | 7/17 | 1,965k | 1,956k |
| July 12 | 7/24 | 1,954k | 1,955k |
Looking at the other side of the dual mandate, price stability is evident. For the past five months, month-over-month Core CPI inflation has come in lower than the expected 0.3%. Although June year-over-year CPI did come in higher than expected at 2.7%, this was primarily driven higher due to exogenous factors such as high oil prices (Israel-Iran War) during the reporting period.[4]
Historically, the strictly data-dependent Federal Reserve would analyze this data and subsequently lower the federal funds rate. Now, with its disjointed policy-making criteria, the Fed is blinded by the theoretical, and perhaps a little “Inflation Derangement Syndrome”. Although the tariff-related impacts on the American consumer have yet to be determined, as the US inks more key deals with our trading partners ahead of the August 1st deadline, as it did with the EU/Japan/UK/Vietnam/Indonesia, many unanchored inflationary fears will dissipate, bringing a weakening labor market under the microscope of the dual-mandate.
For over a hundred years, this is why the Fed has always been data reliant. The future is always uncertain, and the Fed is no visionary.
The Fed’s approach has already diverged from the EU and the United Kingdom. The European Central Bank has already cut rates by 2% this year. The Bank of England has cut twice and appears likely to do so again in August. If the US does not follow suit and continues to maintain restrictive interest rates, the Federal Reserve will unnecessarily impede the golden age of American innovation.
The Last Six MoM Core CPI Readings [5]
| Month | Date Released | Estimate | Actual |
| February | 3/12 | 0.3% | 0.2% |
| March | 4/10 | 0.3% | 0.1% |
| April | 5/13 | 0.3% | 0.2% |
| May | 6/11 | 0.3% | 0.1% |
| June | 7/15 | 0.3% | 0.2% |
The Fed has been wrong before, and we need not look too far into the past. In September 2024, and prior to the election, the Fed cut rates by 50 basis points. In 2020 excessive quantitative easing contributed to rampant inflation, reaching a year-over-year CPI increase of 9.1% in June of 2022.[6] The target federal funds range was 1.50-1.75% in June of 2022, so why is it 4.25-4.50% now, with inflation near 2%?
The Fed needs to cut.
July’s FOMC meeting that began Tuesday is likely to be just like the last: no change in interest rates and continued reluctancy due to tariff-related uncertainty. The Fed is expected to take an extremely cautious approach to cutting the federal funds rate, “preserving” its political independence as pressure mounts across the political spectrum. Demand for US treasuries has been strong, although any seismic shock in the secondary market could trigger Bond Vigilante induced volatility, causing yields to spike. As a result, the yield curve could steepen, the Dollar, already down ~10% year-to-date, could weaken further, and the government could be left with no choice but to issue debt at higher yields. This would be a problem, to say the least.
The paralyzed, divided, and behind-the-curve Fed has backed itself into a corner. If it cuts prematurely, investors may panic. If it waits longer, lenders will continue to gain at the expense of borrowers, and the everyday American will continue to suffer from high mortgage rates, credit card payments, and student debt. In Q1 2025, credit card delinquencies were above 3%, remaining elevated near post-2008 financial crisis highs.[7] Existing home sales fell 2.7% month-over-month in June, demonstrating that elevated mortgage rates continue to restrict the housing market.[8] As long as interest rates remain high, the Powell pain train will continue.
[1] ADP National Employment Report 2025 June
[2] Continued Claims (Insured Unemployment) (CCSA) | FRED | St. Louis Fed
[3] Bloomberg LP
[4] Consumer Price Index – June 2025
[5] Bloomberg LP
[6] 12-Month Percentage Change, Consumer Price Index
[7] Delinquency Rate on Credit Card Loans, All Commercial Banks (DRCCLACBS) | FRED | St. Louis Fed
[8] US existing home sales hit nine-month low in June | Reuters
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