By Jeffrey Hibbeler, Director of Portfolio Management & Senior Portfolio Manager

Last week’s Federal Reserve (Fed) meeting played out largely as expected, with the central bank holding the fed funds target rate range at 4.25-4.50%.¹ Markets had been pricing in no action, which is exactly what happened. But beneath the surface, several developments suggest growing division within the Fed and a labor market that may be starting to show real signs of fatigue.

At the press conference following the announcement, Fed Chair Jerome Powell struck a mildly hawkish tone. While acknowledging progress on inflation, he emphasized that price growth remains above target and cited new potential pressures from tariffs, something the Fed wants to be certain does not turn into persistent inflation. He called it “early days” in terms of evaluating those risks and made clear the Fed is not in a rush to cut until it has more clarity.² That makes September the first real "live meeting" of the year, where a policy change could realistically be on the table, which our team had been forecasting.

Of course, the two dissenting votes stood out the most from this meeting. Governors Bowman and Waller both favored a cut, marking the first time since 1993 that two sitting governors dissented in the same direction.³ While their position may line up with political winds surrounding Fed leadership, there is also some merit to the data-based argument they are making. Waller, in particular, laid out a case for a cut based on softening labor trends. Looking at the latest jobs report, he might be on to something.

The July employment report was weak. Payroll growth came in at 73,000 versus expectations for over 100,000.⁴ More importantly, the prior two months were revised down by a combined 258,000 jobs,⁴ which is a significant adjustment. The unemployment rate ticked up to 4.2%, the labor force shrank for the third straight month and foreign-born worker participation fell year over year.⁴ The continued labor force contraction in the household survey caused the labor force participation rate to decline to 62.2%.⁴

Markets responded quickly to the softer labor data, with yields falling across the curve. The 10-year Treasury declined to 4.25% and the 2-year yield dropped over 20 basis points. We also saw equity markets pull back and the dollar reversing some of its recent strength.⁵ So, where does that leave us heading into the fall?

For now, our base case is a 25 basis point cut in September. But there is still a lot of data to come, including two Consumer Price Index (CPI) prints and another payroll report prior to the September meeting. If labor trends continue to deteriorate and inflation stays quiet, the case will strengthen. The Fed has a bias to cut to continue normalizing policy toward a neutral level; it is just waiting for the data to support it.

From a strategy standpoint, we are maintaining a balanced approach in fixed income. With so much policy uncertainty — across fiscal headlines, trade developments and questions about Fed leadership — we are positioning portfolios for a variety of outcomes, rather than just one, seemingly likely scenario. We have increased our Treasury exposure incrementally, as corporate credit spreads remain tight and the risk-reward tradeoff is not ideal. We have also added some Treasury Inflation-Protected Securities (TIPS) for inflation protection. Within corporates, we are favoring higher-quality and less cyclical names to help manage potential downside risks.

Markets are going to react to every data release, however, that does not mean we need to. We are not in the business of shifting targets every week, but are managing our strategy with a long-term focus. Our view continues to reflect a reasonable base case for one to two cuts this year, depending on how the data evolves. If you want to talk through how this might affect your portfolio, please reach out to your Exencial advisor.

Sources:

1. Federal Reserve Board (7/30/25) – Federal Reserve issues FOMC statement
2. Federal Reserve (7/30/25) – FOMC Press Conference July 30, 2025
3. CNBC.com (8/1/25) – Fed governors Bowman, Waller explain their dissents, say waiting to cut rates threatens economy
4. U.S. Bureau of Labor Statistics (8/1/25) – Employment Situation Summary
5. The Wall Street Journal (data as of 8/1/25) – July Jobs Report: How Markets Are Reacting, in Charts

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