The Federal Reserve downgraded its assessment of the economy even as it held interest rates steady for a fifth straight meeting, and stopped short of executing the sort of communications pivot that might have prepared markets for an imminent rate cut.

The Federal Open Market Committee voted in a split 9-2 decision to maintain the target range for the federal funds rate between 4.25 to 4.50 percent—a level reached in December after a series of cuts in the second half of 2024—with Trump appointees Michelle Bowman and Christopher Waller dissenting from the majority.

This is highly unusual—the last time two governors dissented was under Alan Greenspan as Fed chair in December 1993—but was widely anticipated in financial markets after Bowman and Waller each delivered speeches arguing for lowering rates.

In the statement setting out the decision, officials said “Although swings in net exports continue to affect the data, recent indicators suggest that growth of economic activity moderated in the first half of the year”. Gross domestic product numbers released earlier today showed headline growth topping expectations in expanding at a 3-percent annualised pace in the second quarter, but this was largely driven by massive fluctuations in international trade flows. A cleaner measure of underlying demand—real final sales to domestic purchasers—climbed at a more modest 1.2-percent rate, marking the slowest expansion since 2022.

Policymakers made very few adjustments to the rest of the statement, suggesting that they remain hesitant to fire the starting gun on another round of easing in financial conditions as they grapple with the potential for tariff-led price increases across a range of tradeable goods categories.

Treasury yields are slipping modestly across the curve, and odds on an early-autumn rate cut are edging up slightly as traders adjust positions ahead of the post-decision press conference. With a raft of economic data releases—and off-calendar trade deadlines—set to land between now and the central bank’s September meeting, we suspect that Chair Powell will remain focused on preserving as much policy optionality as possible. But if inflation cools and job growth moderates over the intervening months—as we expect—Bowman and Waller could find themselves among the majority once again in September, with Powell providing air cover for several cuts in the next year.

We will be watching closely over the next hour, and will update you on any material market-moving developments.