On Wednesday, July 29th, Eastern Time, the Federal Reserve announced after its Federal Open Market Committee (FOMC) meeting that the target range for the federal funds rate would remain unchanged at 3.50% to 3.75%.
Thus, following three consecutive rate cuts by the FOMC through the end of last year, it has now held steady for all five monetary policy meetings since the beginning of 2026.
While the Fed's decision to keep rates unchanged was itself in line with expectations, the scale of the rift with three dissenting votes far exceeded market forecasts. Cleveland Fed President Hammack, Minneapolis Fed President Kashkari, and Dallas Fed President Logan formally voted in opposition, all advocating for a 25 basis point rate hike.
Nick Timiraos, a reporter known as the 'new Fedwire,' commented that this marks the first time since 2016 that three voting members have cast dissenting votes on the same stance regarding a policy adjustment.
Bob Michele, Chief Investment Officer at J.P. Morgan Asset Management, and Jim Bianco, President of Bianco Research, both noted that dissenting votes are the core signal for interpreting the direction of policy, indicating that upward pressure on interest rates persists.
Warsh repeatedly emphasized during the press conference that the Fed "will not hesitate to act" to curb inflation, stating, "We have some important decisions ahead." But even more unsettling for the bond market was his stance of "providing no forward guidance," forcing the market to judge the interest rate path from the data on its own.
Markets were hit by a triple whammy: renewed conflict in Iran, the Fed's hawkish hold, and shaken faith in AI. Brent crude surged as much as 8% to reclaim the $90 level, the 30-year U.S. Treasury yield soared to its highest since June 2007, the Dow Jones Industrial Average plummeted 1153 points, tumbling 2.19%, its largest single-day point drop in nearly 15 months, the S&P 500 fell 1.52% to 7316.16, and the Nasdaq Composite fell 1.74% to 24442.94.
The U.S. dollar plunged, down 0.62%, gold rose 0.87%, briefly touching above $4100 intraday.
The Strongest Hawkish Divergence in a Decade? Fed Holds Steady, Emphasizes Inflation Commitment, but Three Committee Members Support Rate Hike
On July 29, the Federal Reserve announced it would keep the federal funds rate at 3.50% to 3.75%, marking the fifth consecutive hold since 2026.
This Fed decision aligned with the expectations of most market participants. By Tuesday's close, CME's FedWatch Tool showed futures market pricing in a nearly 70% probability of no hike this week, slightly over 30% for a 25 basis point hike, less than a 24% probability of holding rates steady at the next meeting in September, and by December, the probability of no change was below 9%, with about a 58% probability of at least two 25 basis point hikes.
The statement released this time was nearly identical in wording to the statement from the previous meeting in June.
As before, this statement continued to emphasize the Fed's commitment to achieving price stability. It reiterated that conflict in the Middle East leads to high economic uncertainty, inflation remains elevated partly due to rising energy prices, the economy is expanding at a steady pace, and the unemployment rate has remained largely unchanged.
This statement replicated the assessment of inflation from the previous statement: "Inflation remains elevated relative to the Committee's 2 percent objective, reflecting in part supply shocks that have led to price increases in specific sectors such as energy."
Compared to the last meeting, there was only one major change in this statement: the voting results showed that among the 12 committee members with FOMC voting rights this year, nine voted in favor of keeping rates unchanged, while three opposed this decision. They were Cleveland Fed President Beth Hammack, Minneapolis Fed President Neel Kashkari, and Dallas Fed President Lorie K. Logan. The statement indicated that all three supported raising rates by 25 basis points at this meeting.
This means that a quarter of this year's FOMC voting members leaned toward taking action to hike rates this time. The dot plot released after the last meeting showed that among the 18 Fed policymakers providing rate expectations, a total of nine forecast at least one 25 basis point hike this year, with six of them forecasting at least two such hikes.
Nick Timiraos, a reporter known as the 'new Fedwire,' commented that this marks the first time since 2016 that three voting members have cast dissenting votes on the same stance regarding a policy adjustment.
In an article, Timiraos noted that this divergence highlights the growing pressure within the Fed, two months after Warsh assumed the role of Chair, demanding action against inflation that has been above target for five consecutive years.
Prior to the decision's release, Timiraos pointed out that if one or two committee members voted against pausing rate hikes at this meeting, it would clearly indicate hawkish pressure is building within the FOMC. Past Fed chairs could placate potential dissenters by including hawkish or dovish language in the statement or hinting at a higher likelihood of action at the next meeting. But Warsh has explicitly stated his intention to abandon these tools, so he may lack sufficient means to keep disagreements below the surface.
The text in black below is identical to the July 2026 FOMC statement, the text in red is new for July 2026, and the text in blue within parentheses is the wording deleted from the June statement:
The Federal Open Market Committee approved the release of the following statement by a vote of 9 to 3 (12 to 0):
The Committee decided to maintain the target range for the federal funds rate at 3.5 to 3.75 percent, in support of the Federal Reserve's dual mandate. The Committee will continue its policy (reiterates its policy) of maintaining an ample level of reserves in the banking system.
Despite continued high uncertainty (partly reflecting conflict in the Middle East region), economic activity has continued to expand at a solid pace. Productivity growth and capital investment have been strong. Job gains have kept pace with growth in the labor force, and the unemployment rate has changed little.
Inflation remains elevated relative to the Committee's 2 percent objective, reflecting in part supply shocks that have led to price increases in specific sectors (including the energy sector). The Committee is committed to achieving price stability.
Voting against this monetary policy action were Beth M. Hammack, Neel Kashkari, and Lorie K. Logan. Each preferred at this meeting to raise the target range for the federal funds rate by 25 basis points.
Rates on Hold, But Warsh Says 'This Is Not a Pause,' 2% Inflation Target Unwavering
Warsh viewed the rise in market interest rates as a signal that financial conditions were already tightening, while reiterating that the 2% inflation target "has no flexibility," and announced a substantive retreat from forward guidance, calling on Wall Street to wean itself off dependence on central bank pronouncements and "capture the true economic signals."
Fed Chair Warsh stated that the U.S. economy continues to show resilience despite recent shocks, with positive growth trends, job gains roughly keeping pace with labor force growth, and little change in the unemployment rate; but inflation remains "too high" relative to the 2% policy objective.
On the market's most pressing question about the interest rate path, Warsh did not provide clear forward guidance. He emphasized that the Fed is intentionally reducing its pre-setting and intervention in markets, hoping to glean more "direct, unfiltered" information from prices like bonds and exchange rates.
At the same time, he reiterated that if inflation remains persistently high over the forecast horizon, a rate increase "is likely to be part of the solution."
Warsh also specifically mentioned that AI-related investment is driving high-tech capital expenditures, but its ultimate impact on productivity, supply capacity, and inflation remains difficult to gauge accurately. This implies that whether investment and productivity improvements can alleviate price pressures remains a key variable in the Fed's subsequent policy assessments.
1) Inflation Bottom Line: No 'Soft Target,' 2% Is the Only Red Line
Against the backdrop of high inflation for over five years, markets once speculated that the Fed might silently tolerate inflation above 2%. Warsh unequivocally shattered this illusion at the meeting, demonstrating a tough stance on defeating inflation.
Warsh stated clearly:
"There is no soft inflation target, there is no soft implicit target — not under this Committee. There is one target, and that's 2%. None of my FOMC colleagues are under any illusion about that."
He admitted that the U.S. has experienced patience and impatience for "63 months (of inflation above target)," and the Fed deeply understands that this situation cannot be cured in nine weeks or with just one month of moderate price declines.
When asked what to do if inflation doesn't come down, Warsh gave a direct response:
"If inflation is too high and does not come down, the best remedy is to raise interest rates."
2) External Relations and Independence: Maintaining Resolve, Free from Interference
During the press conference, Warsh repeatedly emphasized that the Fed will not deviate from its duties due to market or external pressure. He said:
"The Federal Reserve will not waver. Our credibility depends on performing our duties and fulfilling our responsibilities."
Discussing the complex environment the economy has faced in recent years, Warsh listed pandemic-induced supply chain disruptions, military conflict, energy supply interruptions, tariff adjustments, and the surge in AI investment as significant external shocks affecting the economy.
He said the Fed would not ignore these changes but is studying whether these shocks might further propagate and affect the broader price system.
However, he stressed that the Fed focuses on the transmission of these events to inflation and the economy, not the events themselves, and its duty remains to make policy judgments centered on price stability and maximum employment.
3) AI Capital Spending Becomes Key Economic Variable: Growth Nears 20% Over Past Four Quarters
On macroeconomic hotspots, Warsh highlighted the real impact of the AI boom on the real economy and prices, a topic extremely rare in previous Fed meetings.
Warsh disclosed a core set of data:
"In the category of high-tech equipment and software related to artificial intelligence, the latest data shows growth of close to 20 percent over four quarters."
Warsh pointed out that the surge in business capital expenditure is already pushing up prices for "memory and logic chips and related AI infrastructure." The Fed is trying to judge whether such price increases are merely sector-specific relative price changes or will diffuse into broader inflation areas.
"We take these shocks seriously. The Federal Reserve is studying the extent to which the effects of these shocks are broadening, and how much impact they are having on prices far from being directly affected."
On the supply-demand relationship, Warsh believes the Fed has a relatively good understanding of aggregate demand, but significant uncertainty remains regarding aggregate supply, productivity, and the structural changes brought by AI investment.
"We are inferring aggregate supply. We are making judgments about productivity, in a sense there is a race between supply and demand, and the surge in business capital spending around artificial intelligence makes that calculation more difficult."
He also warned that the AI investment boom does not automatically reduce the Fed's policy difficulty. On one hand, productivity gains and supply expansion may help ease inflationary pressures; on the other hand, AI infrastructure construction itself may also push up some upstream prices.
4) Policy Communication Change: Downplaying Forward Guidance, Demanding Markets 'Follow the Data'
Warsh reiterated that the Fed is significantly reducing or even exiting the "forward guidance" commonly used over the past decade or more, no longer attempting to fine-tune market expectations through dot plots or verbal reassurance.
Warsh noted that over the past 42 days (the inter-meeting period), both nominal and real yields across the Treasury yield curve have risen substantially, with increases ranking roughly in the highest decile over the past twenty years. He credited this to the Fed's "stepping back":
"Market participants are learning to follow the ball, not the referee, and market prices will continue to react in the direction and magnitude they see fit. In my view, this is a positive change."
Faced with reporters' concerns about whether the Fed might lose its grip on the narrative, Warsh appeared "not too concerned." He stated bluntly:
"We're trying to step back...... We're interested in how the financial markets react."
He believes that in non-crisis mode, the Fed should not tie its own hands but rather needs to observe the direct, unfiltered reaction of markets to developments.
5) Rates on Hold, But Warsh Says 'This Is Not a Pause'
Regarding the decision to maintain rates this time, Warsh refused to label it a "pause." In his view, if the policy stance is understood merely as whether the federal funds rate changes, it might overlook the adjustments already occurring in the financial markets themselves. He said:
"I wouldn't describe what we did today as something like a pause. I would describe what we did as a strict review of the economic situation."
Warsh stated that over the past 42 days, i.e., between the two FOMC meetings, both nominal and real interest rates across the entire U.S. Treasury yield curve have risen notably, with related movements roughly in the "highest decile or so" over the past two decades.
"Financial market prices did not pause during this intermeeting period; nominal and real rates rose."
Regarding the implication of rising market rates, Warsh did not equate it directly with the Fed having to raise rates, but said that the signals from the bond market are somewhat consistent with the performance of the real economy.
"Economic output is solid, capital spending and productivity are strong, the labor market is solid, stable. The bond market, the Treasury market, seems to be saying the same thing. Even though, to some extent, we didn't do much over 42 days, the market did quite a bit."
Market Reaction
Ahead of the Fed's interest rate decision, markets overall maintained a cautious stance while awaiting policy signals, with the U.S. dollar index weakening slightly, U.S. stocks broadly declining, and the Dow leading the losses. Specifically, the S&P 500 fell 0.61%, the Dow fell 1.47%, and the Nasdaq fell 0.58%. Gold and silver both rose, indicating some safe-haven demand. U.S. Treasury yields rose slightly across both the short and long ends.
After the news was released, market reactions were pronounced. Both the 10-year and 2-year U.S. Treasury yields declined, spot gold surged, briefly breaking above $4100, and stock performance diverged, with the S&P down 0.2%, the Dow down 1.1%, and the Nasdaq turning positive.
Chair Warsh sent a "hawkish hold" signal during the press conference. Afterwards, the dollar continued to weaken, while the euro and pound strengthened. The U.S. 2-year Treasury yield fell 7 basis points, refreshing the day's low to 4.2171%, while the 30-year Treasury yield hit its highest since 2007, surpassing 5.2%.
Spot gold's gains quickly narrowed after briefly topping $4100.
At the close, the S&P 500 index fell 1.52%, the Dow Jones Industrial Average fell 2.19%, marking its largest single-day percentage drop since April 2025, and the Nasdaq Composite fell 1.74%.
