Bond Traders Skeptical of Early Fed Rate Cut, Waller Remains Bullish on July
Bond traders and the Federal Reserve aren’t seeing eye to eye. As of mid-July 2025, the market is growing doubtful about an interest rate cut anytime soon. Most investors are now betting against a move in July or even September. But one key voice at the Fed still thinks otherwise.
Fed Governor Christopher Waller believes a cut could still happen as early as this month. He continues to believe that, even as the market shifts in the opposite direction. Why the difference in opinion? It all comes down to inflation numbers, job data, and what the Fed sees versus what the bond market feels.
We’ll study both sides of the debate, what Waller is focusing on, and how the rate-cut decision could affect markets, the economy, and your finances.
Market Expectations vs. Fed Messaging
For months, bond traders priced in rate cuts by September. That picture crumbled recently as strong jobs data and the threat of tariffs reshaped the narrative. Interest-rate swaps now show next to zero probability for July and roughly 32% for September.
In contrast, Waller continues to argue that policy is too tight and a July cut remains justified. Other Fed officials are split; some echo his stance, while others urge patience amid trade policy uncertainty. The tug-of-war highlights a classic fed balancing act for inflation control without hurting jobs.
Waller’s Statements and Rationale
Governor Waller believes “we’re just too tight,” suggesting rate cuts now to ease policy pressure. He downplays tariff-driven inflation as short-lived and maintains that July remains an appropriate time.
He’s not alone, Governor Michelle Bowman shares the sentiment. Their dovish voices contrast sharply with a more cautious camp, including Richmond Fed President Barkin and St. Louis’s Musalem, who want to see clear inflation trends before moving.
Inflation and Economic Indicators in Focus
Inflation is key. June CPI data, due July 15, will influence decisions. Economists forecast core inflation around 2.9%, a high not seen since February.
Tariffs add another variable, early compensation through price hikes, like a 1.7% spike in consumer prices and $2,300 added cost for the average household. Mixed signals from labor data, robust payrolls but weakening private hiring, muddy the waters further.
The Fed must balance headline inflation against its preferred metrics, particularly core PCE, while evaluating labor market strength and trade pressures.
Bond Market Reaction and Yield Curve Behavior
Bond traders have responded dramatically: two-year Treasury yields jumped after June’s strong payroll report, signaling doubts about July cuts. These yields now hover between 3.7% and 4%, locked in a tight range since May. Swap markets priced in just a ~25% chance of a July cut before data, now essentially zero.
Meanwhile, volatility has remained low, and Treasuries hit their quietest levels in three years. This calm reflects traders stuck between data and differing Fed messages. A hotter CPI could break the balance, pushing yields higher; a cooler CPI might revive cut hopes for September or December .
Broader Economic and Political Implications
If cuts are delayed, it affects homeowners, businesses, and consumers. Higher rates mean costlier mortgages, credit, and borrowing.
Politically, it’s an election year, and tariffs add volatility. President Trump is pressuring the Fed for lower rates, even suggesting favoring a new chair if cuts don’t come. Such pressure threatens the Fed’s independence, stirring concerns among market watchers.
Globally, U.S. policy affects emerging markets and currency values, and tariffs could ripple across trade and inflation worldwide
Conclusion
We’re heading toward a high-stakes July 29-30 Fed meeting. Traders expect no moves in July and are split on September. Waller remains hopeful for earlier action. It’s all riding on CPI, PCE, jobs, and global ripple effects.
We need fresh data to tip the scales. A hot CPI could push the next cut into winter; a cooler print might reopen debate. In any case, bond yields and investor mood are likely to change quickly. As things stand, markets are cautious and Fed insiders are uncertain, making this summer’s Fed decisions pivotal for 2025.
FAQS:
When the Fed purchases bonds, it adds extra money into the financial system. This makes borrowing cheaper, so interest rates usually go down.
The Fed funds rate is the rate banks use to lend money to each other for one night. It helps control inflation, borrowing, and spending in the economy.
When the Fed raises rates, bond prices often drop because new bonds pay more interest. Lower Fed rates can make older bonds more valuable.
Disclaimer:
This content is for informational purposes only and not financial advice. Always conduct your research.