FED JULY POLICY – A DIFFERENT TYPE OF CONSENSUS

FED JULY POLICY – A DIFFERENT TYPE OF CONSENSUS

At the end of the FOMC meet on 29-July, there was a decision to hold rates at the current range of 3.50%-3.75%. However, the decision was far from unanimous with 3 members of the FOMC calling for rate hikes to contain inflation. Unlike Jerome Powell, who would do a lot of talking, Kevin Warsh lets the data do the talking. This time around, the data did talk volumes. One message is that the Fed may have avoided a rate hike in July, but it will have to hike the Fed rates; sooner rather than later.

The vote favoured status quo in the ration of 9:3. The three dissent votes came from Beth Hammack, Neel Kashkari, and Lorie Logan. Their argument was that inflation had been above the Fed target of 2.0% for more than 5 years now. With the ongoing US-Iran war putting further pressure on oil prices in particular and prices in general, the pressure on the Fed to hike rates is increasing. Kevin Warsh is also a lot more circumspect, in that he wants to give very limited signals to the market about the trajectory of rates.

WHAT WE READ FROM THE JULY FED POLICY STATEMENT

Here are some key takeaways from the Fed policy statement released late on July 29, 2026.

The members of the FOMC voted unanimously to keep the benchmark rates in the range of 3.50% to 3.75% in a 9:3 vote. However, what is significant is the splitting of the vote, with 3 key members of the FOMC calling for immediate rate hikes.

The contention of the 3 dissenting votes was that the Fed had done little other than stating that reining inflation was its primary focus. Inflation had been continuously rising in the last one year, but the Fed had made not changes to its approach to rates.

Critics have argued that Fed not acting on rates despite inflation at above 4.0% could be seen as a negative signal. The Fed is expected to anchor inflation and inflation expectations, and that is something that is not happening at the current juncture.

The need for a rate hike has become critical because Fed had cut rates by 175 bps between September 2024 and December 2025 to counter rising jobs risk. However, unemployment has tapered, but inflation has been out of control in 2026.

On the growth front, the GDP growth continues to be above expectations and the conflict in the Middle East appears to have had a limited impact on the level of economic activity in the US. Even unemployment stayed around 4.2%, despite fewer jobs added.

The argument of the hawks also stems from the fact that rising inflation has been a burden on household budgets. What the Fed fears is that a rise in interest rates could result in a higher EMI burden for households. The 25-bps rate hike in 2026 still holds.

Concerns over inflation have also been raised by Governor Chris Waller and Fed Chair Kevin Warsh in the recent past. In fact, Kevin Warsh’s contention “current policy is well-positioned to bring inflation back to 2.0%”, was disputed by the 3 dissent voters.

Donald Trump had open conflicts with Jerome Powell on the pace of rate cuts. However, till now, Trump has been more supportive of Kevin Warsh. It remains to be seen if Warsh prefers to toe the Trump line or takes up cudgels against rising inflation.

While the Fed has avoided giving any guidance on rates, the message is clear that if inflation did not come down decisively, then rate hikes were almost inevitable in September.

WHAT DOES THE CME FEDWATCH TELL US?

The CME Fedwatch calculates the probability of rate hikes based on the trading in Fed Fund futures. Here are the probabilities across milestone meetings over next 2 years.

Data source: CME Fedwatch

Clearly rate cuts are almost ruled out till the end of 2027, unless the macros change substantially, which looks unlikely. After 3 dissent votes (calling for a rate hike) in the July meeting, there is a 65.2% probability of the first rate-hike happening in the September 2026 meeting. By then, there should greater clarity on the trajectory of the US-Iran war.

However, through 2026 and 2027, the maximum rate hike that is anticipated is only 50 basis points up to the range of 4.00%-4.25%. That has not changed since the last meeting. We may be entering an interesting phase where the global central banks may start to take a more hawkish view of interest rates; and the Fed lead will be the most critical!