Quick Takes:
- Second quarter U.S. GDP expanded at a solid 3 percent pace, showing the economy still has momentum despite tariff uncertainty.
- The Fed kept the federal funds rate between 4.25 and 4.5 percent and said it needs more evidence of cooling inflation before easing.
- Strong growth and a cautious Fed suggest investors should not count on lower interest rates until economic data softens.
The U.S. delivered a stronger-than-expected second-quarter GDP report on Wednesday. Output grew at a 3 percent annualized rate after a 0.5 percent contraction in the first quarter, signaling renewed momentum despite tariff uncertainty. The headline number owes much to a sharp swing in trade flows, yet the underlying picture shows consumers still spending and inflation edging lower toward the Federal Reserve’s 2 percent goal.
At its policy meeting a few hours later, the Federal Open Market Committee kept the federal funds target in a 4.25-to-4.5 percent range for a fifth straight time. Two governors dissented in favor of an immediate quarter-point cut, highlighting a rift inside the central bank. Still, Chair Jerome Powell reiterated that policymakers want clearer evidence that price pressures will stay contained before easing.
Why the Fed Hesitated?
GDP strength complicates the case for rate cuts. A 3 percent growth rate with unemployment near historic lows suggests the economy still has enough speed to risk reigniting inflation if financial conditions loosen too quickly. Powell emphasized that cutting too soon could undo recent progress. Markets nevertheless now assign a 46% probability to a cut at the September meeting according to the CME FedWatch, betting that tariffs and slower hiring will curb demand in the coming months.
The Fed also watches a softer metric called final sales to private domestic purchasers, which slowed to 1.2 percent. This indicator strips out volatile trade and inventories and shows that private-sector demand is cooling even as the headline GDP rebounds. The mixed signal keeps officials cautious.
Powell’s Press Conference Highlights
Chair Jerome Powell used the post-meeting briefing to stress patience and data dependence. He said the committee has “made no decisions about September, we do not do that in advance,” and will reassess once the next run of inflation and labor-market numbers arrives.
Powell also framed the timing problem in practical terms: cutting too early risks a snap-back in prices that would force the Fed to hike again, whereas waiting too long could bruise hiring. “If you move too soon, you wind up maybe not getting inflation all the way fixed, and you have to come back and raise rates. If you move too late, you might do unnecessary damage to the labor market,” he said.
He acknowledged that recent tariffs complicate the outlook by temporarily lifting goods prices, but argued that longer-run inflation expectations remain anchored. Until officials see “greater clarity” on how trade policy and slowing private demand interact, the fed-funds range of 4.25 to 4.50 percent is likely to hold, with any adjustment contingent on core inflation trending convincingly toward 2 percent and payroll growth slipping further. Powell’s message: policy easing is possible, but only if the data force the issue.
The Spillover to Canadian Yields
For Canadians, the key question is what sustained US resilience and a patient Fed means north of the border. The Bank of Canada held its overnight rate at 2.75 percent on Wednesday, its third consecutive pause. Governor Tiff Macklem faces a weaker domestic economy, and headline inflation has already returned close to target.
On Thursday, GDP estimates for June were actually better than expected. Statistics Canada reported that real GDP fell 0.1 percent in May after the same decline in April as mining, quarrying, and oil and gas dragged output lower, while manufacturing rebounded 0.7 percent; an early June estimate points to a 0.1 percent gain led by retail and wholesale trade even as factory output slips again. Overall this would point to -0.1% GDP growth in Q2 which previously this week was expected to come in at -0.3%.
A Reuters poll taken before the decision shows most economists still expect two more BoC cuts by year-end, starting in September. The new data in both the U.S. and Canada is starting to challenge that assumption. Treasury yields slipped only slightly after the Fed statement, and the two-year note remains just under 4 percent. Canadian bond yields continue to shadow US moves.
What to Watch Next
The decisive variables now are US core inflation and payroll growth. Sticky service prices or a solid July jobs report would give the Fed cover to stay on hold, pressing Canadian yields higher for longer. Conversely, a clear slide in US hiring could let Powell cut without fearing renewed inflation, delivering relief to North American bond markets.
The latest Fed decision and GDP surprise suggest that current rates may persist unless global growth slows markedly.