July FOMC recap: The Fed holds, but the long end isn’t convinced

• The Fed held rates at 3.50%-3.75%, with a 9-3 vote split, with three members of the committee electing for an immediate 25bps rate hike.

• There was no dot plot at this meeting and little forward guidance on the Fed’s next move, extending the communication reset we flagged in June.

• June inflation data was softer, with headline CPI at 3.5% while core came in at 2.6%. The improvement was almost entirely driven by energy, and oil has since turned higher again. We think one soft print is unlikely to change the Fed’s direction of rate travel.

• We think the risk for policy rates is skewed towards a hike. We continue to favour short-duration (1-3 years) exposure, while staying selective for medium-tenor (5-10 years) bonds and remain cautious on the long end (>10 years).

Fed Funds Rate unchanged, but the committee has split 

The Fed left the target range for the Fed Funds Rate unchanged at 3.50% - 3.75%, a fifth consecutive hold. Unlike June, this decision was not unanimous. The FOMC voted 9-3, with three members preferring an immediate 25bps increase at this meeting.

A dissent of this scale and direction has been rare in recent years, last occurring in September 2016, landing at a time when inflation has run above the Fed’s 2% target for more than five years. In our view, this is the clearest evidence yet that a hawkish bloc on the committee is no longer content to wait.

The accompanying FOMC statement was almost unchanged from June and remains considerably shorter than the statements the market is accustomed to under Jerome Powell. The Fed again described economic activity as expanding at a solid pace despite elevated uncertainty owing in part to the Middle East conflict and noted that job gains have kept pace with the workforce while the unemployment rate has changed little. As expected, no dot plot accompanied this meeting, as projections are only released in March, June, September and December.

Notably, forward guidance remains absent. There was no signal on September, no characterisation of the policy stance as restrictive or accommodative, and no acknowledgement of the softer June inflation data in the statement. This reflects the communication framework Kevin Warsh introduced in June, which now appears firmly in place.

Parsing the split vote

We think the vote split is now the market’s primary signal on the policy path. Warsh has removed explicit forward guidance, and with no dot plot this meeting, there were no projections to parse either. What remains is the vote split: three dissents in favour of a hike.

The dissents broadly reinforce the message from June’s dot plot. As a recap, the median end-2026 Fed Funds Rate projection rose to 3.8% from 3.4%, with nine of 18 participants projecting rates above current levels by year-end and the range of year-end projections spanning 3.6% to 4.1%. Warsh did not submit a projection, citing his long-standing objection to the format. As of 30 July 2026, the market is pricing in 1-2 rate hikes by the end of the year.

For investors, the practical implication is more volatility around each data release. This is what we flagged in June. Without forward guidance, markets must re-derive the Fed’s reaction function from scratch on every CPI, PCE, and payrolls print, and the resulting yield moves are larger. The dissents in this meeting add a second layer of uncertainty on top of that.

Press conference highlights: “Warsh-ful thinking – a period of review, not a pause”

Warsh pushed back firmly on the idea that softer June inflation settles anything. He urged patience from markets, businesses and the public, arguing that more than five years of above-target inflation could not be undone in nine weeks or by a single month of modest price declines. He had already rejected a “mission accomplished” reading of the June CPI report when it was released, and he did not soften that position here; Warsh was adamant that the Fed would not waver, and that its credibility depends on delivering on its price-stability mandate.

He also rejected the idea that the Fed is “on pause”. Instead, Warsh described the pause as a rigorous review of the economic situation and summarised the stance as a period of watchful thinking rather than watchful waiting – a distinction we view as deliberately withholding any implication that the next move is simply a matter of time.

He reaffirmed the 2% target and the communications reform agenda. Warsh restated the Fed’s “just facts” approach, arguing that the Fed will steer clear of forecasting and that uncertainty does not mean a lack of clarity. He committed to holding post-meeting press conferences through year-end. Still, he left open the possibility that future press conferences would be held only when the Fed deems the news warrants one.

In our view, the message for investors is straightforward: do not expect to be told what comes next; the era of forward guidance is firmly over. The appropriate response is to position for a range of outcomes rather than for a forecast, and to accept that data releases will move portfolios more than they used to.
 

Recent macroeconomic data: Softer inflation but no room to ease

June CPI came in much softer than expected. Headline CPI eased to 3.5% Y/Y (May: 4.2%), the first decline in five months, and fell 0.4% M/M on a seasonally adjusted basis (largest one-month decline since April 2020). Core CPI, which strips out the more volatile food and energy components, eased to 2.6% Y/Y (May: 2.9%). The Fed’s preferred gauge of PCE inflation for June is due imminently, and its path from now till September will be a key metric to watch.

Much of the improvement reflected lower energy prices, with gasoline prices falling sharply during June. There were also modest improvements in underlying inflation, including softer shelter inflation and flat core services inflation.

Two developments since then point the other way. Firstly, energy prices have rebounded strongly since a low in June. Both Brent and gasoline prices have posted 18+% increases in the month since the US/Iran ceasefire collapsed in early July. Secondly, fresh US tariffs took effect during the last week of July. On that basis, we would expect the future CPI reports to potentially re-accelerate moving forward.

On the other hand, the labour market has displayed moderate signs of cooling. June payrolls rose just 57,000 against a 115,000 consensus, and the data for both April and May were revised down a combined 74,000. Nevertheless, the unemployment rate fell to 4.2% from 4.3% (May), reflecting a contraction in the labour force participation rates rather than stronger hiring. Average hourly earnings growth ticked up to 3.5% Y/Y in June but remains slower than levels seen in 2025. This is the combination behind the FOMC’s observation that job gains have kept pace with the workforce even as the labour force has contracted. In our view, it is not a dovish signal: a labour market that tightens through shrinking supply, with wage growth picking up, does not give the Fed room to ease.

Overall, we read the data as insufficient to change the Fed’s hawkish tilt. It was not soft enough to reopen the case for cuts, and one month of relief driven by energy prices that has since rebounded is not a trend.

Bond market reaction: The long end did the work

The bond market’s reaction told the real story. The 30-year Treasury yield rose more than 10bps to 5.2% (highest in 19 years), and the 10-year climbed around 7bps to roughly 4.67%. By contrast, the 2-year, the tenor most reactive to policy rates, inched down 4bps – representing a steepening of the treasury curve. In our view, investors appear increasingly concerned that the Fed might be too slow on inflation, resulting in higher compensation to hold long-dated bonds.

There was some irony in the timing. Warsh had credited the bond market with doing some of the Fed’s tightening work for it. Within the hour, the long end moved further against him.

Looking ahead, we continue to expect the risk is skewed towards further tightening. This is consistent with what we have said for months since the outbreak of the US/Iran conflict.

Table 1: Fund recommendations