August 4, 2025

Taylor St. Germain:
Hi everyone. My name is Taylor St. Germain with ITR Economics. Thanks for joining me on this edition of TrendsTalk. We at ITR are your apolitical and unbiased source of economic intelligence. And today we have a special guest. We have a speaker, senior economist, host of FedWatch, team leader. She has a lot of titles. My colleague, Lauren Seidel-Baker is joining us. Thanks for being here, Lauren.

Lauren Saidel-Baker:
Thanks, Taylor. Great to be here.

Taylor St. Germain:
Interesting week, interesting day for economic data, a lot of things going on in the world of economics. And I talk about how excited I am for GDP releases and Fed meetings. I don’t know if everyone else gets as excited as we do. But I really wanted to focus in on the Fed decision that was made this week to hold rates steady.  I figured I’d just kick off with a few comments from the meeting and then get your reaction here, Lauren. So I wanted to highlight for everyone the FOMC voted 9 to 2 to keep the Fed funds rate steady. The reason I call that out is because as Lauren and I were chatting before this, this is the first time in over 30 years we had two board members dissent on the policy decision. But the overwhelming majority said we’re holding rates steady and that’s where we’re at. As we listen to Chairman Powell’s press conference, he described the decision to hold rates as appropriate to guard against inflation while waiting for more data. That’s something we’ve heard from him a lot in past meetings. He also highlighted the uncertain impact of tariffs on inflation, noting that their effects could be temporary or persistent, but he remains cautious until more data emerges. And then finally, of course, he signaled no decision has been made yet for the September meeting and that future policy adjustments will be data dependent. So as much as we look forward to these things, Lauren, really no surprises from our end at least, but wanting to get your initial reactions, are you surprised that the Fed held rates steady?

Lauren Saidel-Baker:
No surprise to the overall decision, but that messaging beneath the surface, that’s where we’re starting to see some friction. And this meeting with two descents, it was kind of a strange continuation of a gap that we started to see in that June meeting where there are almost two camps, right? We saw the SCP, the summary of economic projections in June come in with about half of bed governors of those voting members looking for either zero or 25 basis points of cuts this year, and the other half going 50 to 75. So a little bit of daylight starting to form between these two groups.  Again, the two descents today, that is just two descents. And at the end of the day, there are always going to be different opinions. We just don’t usually see those come out in quite this way from the Fed. So they are focused on a lot of things. I mean, a lot of uncertainty out there, even with the labor market, we have been talking about that being in balance and we’re seeing it, yes, maybe loosening, but from such a strong starting point, inflation is the kind of aspect of that dual mandate to be focusing on. But there are a lot of ways that different groups could be reading this data as it goes forward. We can just put out our ITR forecast where we are much more concerned about inflation. So we don’t see the Fed significantly cutting rates from this point forward.  Maybe we’ll get 25. I struggle even to see 50 personally. But at the end of the day, I don’t think that’s really what’s materially going to move the needle on economic growth. You mentioned the GDP numbers that came out today. Really just as we had expected, we have, I forget our accuracy rate, but this is the environment that we have been expecting. The outlook still very much stands. So I would say if you’re a business decision maker, even an individual, now is not the time to wait out lower interest rates. I think the market is really a little too excited about the prospect of rate cuts. And today I checked the numbers. There’s still pricing in about a 60% chance of a cut in September. So we shall see. We’ve got a lot of data coming down between now and then.

Taylor St. Germain:
Well, and Lauren, I think there’s some misconceptions about the impact of interest rate cuts on the economy. And I think for those of you listening, Lauren and our chief economist Brian held a webinar this week as well, where they dove into this a little bit.  And a 25 basis point cut, even if that does come in September, I don’t really see that as changing our economic outlook or moving the needle. But correct me if I’m wrong.

Lauren Saidel-Baker:
No, I don’t either. 25 basis points. I mean, it’s nice to have, right, if you’re looking at, well, actually, no, that’s not true. I was going to give the example. If you’re looking at getting a mortgage, right, you’d love to get an extra 25 basis points off, but we don’t even see mortgage rates moving one to one with the Fed funds rate this time around.  The bond market really is pricing in that higher inflation that we have been warning about for, gosh, how long now a year or from ITR. So we’re starting to see, I think as the data rolls in, as more and more evidence, more of these leading indicators are really coming to the forefront. We’re starting to see a lot of the smart money. We really put a lot of faith in what the bond market is telling us. It’s a clear signal. They are very clearly saying inflation is a risk going forward. Don’t get too complacent with pricing levels. That’s going to bite in the near term.

Taylor St. Germain:
Yeah, yeah, absolutely. The bond market’s smarter than than most. So we pay attention to that, that very closely.  You know, as we think to the second half of the year, we are still expecting this inflation to be persistent. Now we can debate if it’s close enough to the Fed target to get a cut or not. That’s I’m sure what the debate will be in September. But the real risk is is tariffs, right, or one of the risks, I’ll say, tariffs is only one part of our higher inflation equation. There’s a number of other factors. But through a lot of the analysis that I saw from the presentation you did with Brian, we might not really be feeling the impacts of the tariff price increases yet. And that could still be to come, not just in the near term, but that could even be a longer term impact, if I’m correct.

Lauren Saidel-Baker:
Yes, you are absolutely correct. And for anyone listening who wants access to that webinar, you can find it on our website.  We really dive deep into this topic. But Taylor, you’re exactly right. It’s not just tariffs, and it certainly is not tariffs yet. Our analysis suggests that it’s going to take between 9 and 18 months for those tariff impacts really to flow through the economic mechanism to become apparent in the data that we see. So what we’re seeing now, I mean, this is rise in electricity prices. This is those persistent rise in labor costs. This is past fiscal and monetary policy both. There is so much liquidity out there. There are so many different inflationary pressures coming down the pipeline at us. Even if tariffs just, we could wave a magic wand and eliminate all of them tomorrow. That does not mean that inflation will keep going down. So I think inflation, it’s getting the headlines. It’s getting the blame. The tension is latched onto this item. But that is not the fundamental reason if you start to peel back the onion.

Taylor St. Germain:
And if I linger on, I know we’ve been talking short term, but if we if we think long term, you know, ITR thought process is that yeah, we could see there’s potential for either flat rates or even a minor cut this year. But as we look further down the line, because of long term tariff impacts, because of higher labor costs, higher electricity costs, fiscal spending, we see rates in inflation moving higher, broadly speaking, for the second half of the decade.  So if I’m one of our clients or one of the folks listening in, how do we best prepare for the next five years with these higher inflation and higher interest rates?

Lauren Saidel-Baker:
Yes, the first thing is just acceptance. It’s like going through the stages of grief.  I think we have to get to the fact that rates will be higher than they were in the past decade. That was an abnormally low interest rate and inflation environment, but it’s very prevalent in our mind. It’s the most recent case we all went through, right? Our short-term memory is very, very strong. That’s just human nature. So getting that, you know, two to three to 4% mortgage rate out of your mind, we’re looking for something, if you go back a little bit further, look to the 90s, look to the early 2000s. We had significantly higher interest rates back then, but activity still continued, right? People still bought houses at those six or seven or 8% or even nine or 10% mortgage rates. So it can happen. It’s just going to take a reset. For businesses especially, it’s going to take laser focus on margins because the risk that you run here with higher inflation, with all of these other pressures, it’s profitless prosperity. And we don’t want to see that for anyone, that over-focus on the top line at the detriment of your actual profitability, which is why we’re all in business in the first place.  So it’s going to take something of a mental shift. And as soon as you get there, you can start planning for the growth ahead and really take advantage of the cycle.

Taylor St. Germain:
Yeah, I’ve been saying, you know, for us, it’s not a question of will we grow over the next five years? It’s can you keep up with the growth, but that growth will come at a higher cost to your point. So we have to be razor focused on our margins, not that we ever aren’t. But this is a different environment than what we’ve been used to for the last 15 years.  So important for everyone to know. Lauren, one one quick question. What are your odds on a rate cut in September?

Lauren Saidel-Baker:
Well, I’m usually wrong and I enjoy being wrong. So I just say no cut. I know that’s outside consensus.  I just, there are two rounds, two months worth of data, both for jobs reports and for inflation coming in. We’ve started to see those early signs of inflation creeping back in. So my expectation is we’ll get some stickier inflation numbers, maybe even a little bit more upside. I think that’s gonna hamstring the Fed, even if they wanted to cut rates, that’s really gonna make it hard to do so. So I’ll go on record today. My base case is no cuts, even if we get a cut though, not really gonna move the needle. And I’ll be diving into this much more deeply this Friday and every Friday going forward on FedWatch. I hope you’ll all join us.

Taylor St. Germain:
We’ll all go on the record to support you. I don’t think we’re going to get a rate cut in September either, but we’ll be optimistic for everyone else out there that’s looking for one.  Yeah, Lauren, thanks so much for joining us. And as Lauren mentioned, she’s the host of FedWatch, and we’ll be taking over for our Chief Economist, Brian. And I know on TrendsTalk, we talk about a lot of different aspects of the economy, but Lauren will be laser focused on the Fed, their mandates, the economy, inflation and interest rates, what that means. And so please head over to our website, our LinkedIn, check out FedWatch. You can hear from Lauren on the Fed every Friday. And thank you all for joining us. We plan on having more guests like Lauren from ITR on as we unpack the fun times that we’re in. So thank you so much for joining us today. Please remember to like and subscribe to TrendsTalk and Fed Watch, wherever you listen to your podcasts. And I look forward to seeing you all in the next one. Thanks so much. Take care for now.