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We expect most FOMC participants to conclude that downside risks to the labor market remain firmly in place and to support a second consecutive rate cut this week.

Treasury yields fell over the past month as futures almost fully price in a second straight rate cut next week, after Powell warned last week that the labor market may now be at a stage where “further declines in job openings might very well show up in unemployment.”

Powell described today’s move as “a risk-management cut,” with rising downside risks to the employment mandate making it appropriate to resume “moving in the direction of neutral.”

With a 25bp cut widely expected, the key question is whether the Fed will frame it as a fine-tuning of its current moderately restrictive stance or as a renewed easing cycle toward a more neutral stance.

A rate cut in September remains a possibility if the labor market proves to be "on the edge" and weakens sharply, but that seems unlikely at this point. For now, "we have a long way to go to really understand exactly how [the tariff-related inflationary effect] will be."

We expect the Fed to leave rates unchanged at this week’s meeting and do not anticipate growing dovish support. The uncertainty over the end level of tariffs and its inflation impact, along with a still solid labor market, give the Fed room to wait.

Mid- and long-term Treasury yields have pulled back from last month’s highs amid soft inflation prints and dovish signals from Fed officials like Bowman and Waller, who have voiced support for a July rate cut.