Fed’s Biggest Split in 30 Years: Three Camps Battle Over Rate Cuts as Bond Bulls Lose Confidence in September Easing

TradingKey - The Federal Reserve’s July FOMC meeting concludes on July 30, with markets widely expecting no rate cut and a first rate cut in September. But deep internal divisions among Fed policymakers are making Treasury investors hesitant, prompting bond bulls to scale back bullish positions ahead of the decision.

While consensus holds that the Fed will keep its target rate at 4.25%–4.50%, the real focus is on the divergent views among FOMC members — and what Chair Jerome Powell will say about the path forward.

A Rare Three-Way Split in the Fed

According to The Wall Street Journal’s Nick Timiraos, this could be the first time since 1993 — across 259 meetings — that more than one Fed governor openly disagrees with the Chair.

This historic rift stems from sharply different views on the inflationary impact of Trump’s tariffs, health of the U.S. labor market and urgency of rate cuts.

Three distinct camps have emerged:

1. The “Cut Now” Camp

Led by Christopher Waller and Michelle Bowman, both seen as potential successors to Powell under a second Trump administration, this group argues that:

• Tariff-driven inflation is likely transitory, not persistent
• The labor market is losing momentum, and waiting too long risks unnecessary job losses
• The Fed should act preemptively, not reactively

Waller and Bowman are the only two FOMC members who projected three rate cuts in 2025 in the June SEP.

2. The “Wait-and-See” Middle Ground

This group, including San Francisco Fed President Mary Daly, acknowledges the risks but wants more data before acting.

Daly has said she needs to see at least two more months of inflation and employment data to confirm that tariff pass-through is not accelerating and economic activity isn’t reaccelerating.

They remain open to cuts, but only if the data confirms a softening trend.

3. The “Wait for Proof” Hawks

Officials like Raphael Bostic, President of the Atlanta Fed, want clear evidence of economic weakness before considering rate cuts.

Bostic warns that after years of high inflation headlines, consumer expectations about prices could shift, turning what should be a temporary tariff shock into a longer-lasting inflationary impulse.

Treasury Market Pulls Back

Ahead of the July meeting, JPMorgan’s weekly survey of Treasury clients shows that net long positions have dropped to their lowest level in two months — signaling weakening confidence in a September rate cut.

This pullback reflects growing doubts about the timing and necessity of easing, especially as recent economic data shows resilience.

The U.S. goods trade deficit fell 10.8% in June to $86 billion, suggesting the drag on Q1 GDP from trade may reverse in Q2. The Atlanta Fed’s GDPNow model now forecasts Q2 GDP growth of 2.9%, a sharp rebound from Q1’s -0.5% contraction.

Meanwhile, the U.S. has reached tariff deals with Japan and the EU, both agreeing to a 15% base rate — below earlier threats of 24–30%. This reduces uncertainty and diminishes the risk of imported inflation, strengthening the case for the Fed to hold its restrictive stance.

Rate Cut Odds Fade

As of this writing, markets price in only a ~60% chance of a September rate cut, down from 75% at the start of July.

While the Fed may still cut this year, the path is no longer clear — and the battle within the FOMC is now front and center.