On Wednesday, July 29, Eastern Time, the Federal Reserve announced following its FOMC monetary policy meeting that the target range for the federal funds rate remains unchanged at 3.50% to 3.75%.
Since then, following three consecutive rate cuts through the end of last year, the FOMC has held rates steady at all five policy meetings since the beginning of 2026.
The Fed’s decision to hold rates steady was in line with expectations, but the extent of the three dissenting votes far exceeded market forecasts. Cleveland Fed’s Hammack, Minneapolis Fed’s Kashkari, and Dallas Fed’s Logan formally voted against the decision, each advocating for a 25-basis-point rate hike.
Journalist Nick Timiraos, known as the "New Fed Whisperer," commented that this is the first time since 2016 that three voting members have cast opposing votes on the same 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 key signal for interpreting policy direction, suggesting that upward pressure on interest rates persists.
Wash repeatedly emphasized at the press conference that the Fed "will not hesitate to act" to curb inflation, stating, "We have some important decisions ahead of us." But what unsettled the bond market even more was his stance of "not providing forward guidance," leaving the market to determine the interest rate path on its own from the data.
The market faced a triple shock from the resumption of conflict in Iran, the Fed’s hawkish hold, and growing skepticism toward AI. Brent crude surged 8% back above $90, the 30-year U.S. Treasury yield spiked to its highest level since June 2007, the Dow plunged 1,153 points, dropping 2.19%—its largest single-day point decline in nearly 15 months—the S&P 500 fell 1.52% to 7,316.16, and the Nasdaq dropped 1.74% to 24,442.94.
The U.S. dollar dropped 0.62%, while gold rose 0.87% and briefly surpassed $4,100 intraday.
The strongest hawkish divide in a decade? The Fed holds steady, reiterates its commitment to inflation, but three voters support a rate hike.
On July 29, the Federal Reserve announced that it would maintain the federal funds rate at 3.50% to 3.75%, marking the fifth consecutive hold since 2026.
This Federal Reserve decision was largely in line with market expectations. By Tuesday’s close, CME Group tools indicated that futures markets priced in a nearly 70% probability of no rate hike this week, a slightly over 30% chance of one 25-basis-point hike, less than a 24% probability of holding rates steady at the next meeting in September, and under a 9% chance of no rate hikes by December, with approximately a 58% probability of at least two 25-basis-point increases.
The resolution statement announced this time closely mirrors the language used in the previous meeting's statement in June.
As with the previous statement, this statement again emphasizes the Fed’s commitment to achieving price stability. It reiterates that the conflict in the Middle East has led to heightened economic uncertainty, inflation remains elevated, partly due to rising energy prices, and the economy is expanding steadily with unemployment holding roughly steady.
This statement repeats the previous statement's assessment of inflation: “Inflation remains high relative to the Committee’s 2% target, partly reflecting supply shocks that have pushed up prices in specific areas such as energy.”
Compared to the previous statement, this one features only one major change: the vote results show that nine of the twelve FOMC members with voting rights this year supported maintaining interest rates unchanged, while three opposed the decision. These three are Beth Hammack, president of the Cleveland Fed; Neel Kashkari, president of the Minneapolis Fed; and Lorie K. Logan, president of the Dallas Fed. The statement indicates that all three supported a 25-basis-point rate hike at this meeting.
This means that a quarter of this year’s FOMC voters favor raising rates at this meeting. The dot plot released after the last meeting showed that among the 18 Fed policymakers who provided rate projections, nine expected at least one 25-basis-point hike this year, with six expecting at least two such hikes.
Journalist Nick Timiraos, known as the "New Fed Whisperer," commented that this is the first time since 2016 that three voting members have cast opposing votes on the same policy adjustment.
Timiraos wrote that this divide highlights growing pressure within the Federal Reserve, two months after Walsh became chair, to act on inflation that has remained above target for five consecutive years.
Timiraos pointed out before the announcement that if one or two committee members had voted against pausing rate hikes at this meeting, it would clearly indicate that hawkish pressure within the FOMC is building. In the past, Fed chairs could appease potential dissenters by adding hawkish or dovish language to statements, or hinting that action was more likely at the next meeting. But Walsh explicitly stated he would abandon these tools, leaving him with insufficient means to suppress disagreements beneath the surface.
The black text below is identical to the statement from the July 2026 FOMC meeting,red textis the new addition for July 2026, andblue textin parentheses indicates the wording removed from the June statement:
The Federal Open Market Committee approved 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% to support the Federal Reserve’s dual mandate. The committee will continue to implement (reaffirm) the policy of maintaining ample reserves in the banking system.
Despite continued high uncertainty (partly due to conflicts in the Middle East), economic activity continues to expand at a solid pace. Productivity growth and capital investment remain strong. Employment growth has kept pace with labor force growth, and the unemployment rate has remained largely unchanged.
Inflation remains elevated relative to the committee’s 2% target, partly due to supply shocks that have pushed up prices in specific sectors, including energy. The committee is committed to achieving price stability.
The policymakers who voted against this monetary policy action were Beth M. Hammack, Neel Kashkari, and Lorie K. Logan, all of whom favored raising the target range for the federal funds rate by 25 basis points at this meeting.
Interest rates remain unchanged, but Waugh stated, "This is not a pause," and the 2% inflation target remains firm.
Wash viewed the rise in market interest rates as a signal that financial conditions have already tightened, reiterated that the 2% inflation target "leaves no room for flexibility," announced a substantial withdrawal of forward guidance, and called on Wall Street to move away from reliance on central bank statements and "seek out real economic signals."
Federal Reserve Chair Walsh said the U.S. economy has shown resilience amid recent shocks, with a positive growth trend, employment growth largely in line with labor force growth, and little change in the unemployment rate; however, inflation remains "elevated" relative to the 2% policy target.
On the issue of interest rate paths most concerning the market, Walsh did not provide clear forward guidance. He emphasized that the Fed is intentionally reducing its preconditions and interventions in the market, aiming to obtain more “direct, unfiltered” information from prices such as bonds and exchange rates.
At the same time, he repeatedly emphasized that if inflation remains elevated throughout the forecast period, interest rate hikes “are likely to be part of the solution.”
Wash also noted that AI-related investments are boosting capital expenditures in high-tech sectors, but the ultimate impact on productivity, supply capacity, and inflation remains difficult to assess. This means whether investment can alleviate price pressures through improved productivity remains a key variable in the Fed’s future policy evaluations.
1) Inflation floor: No "soft target"—2% is the only red line
Amid more than five years of high inflation, the market had speculated that the Fed might quietly tolerate inflation above 2%. Wessel shattered this illusion at the meeting, demonstrating a firm stance on defeating inflation.
Wash clearly stated:
There is no soft inflation target, no soft implicit target—it is not possible under this committee’s watch. There is only one target: 2%. None of my FOMC colleagues harbor any illusions about this.
He admitted that the patience and impatience experienced by the United States have lasted for “63 months (inflation above target),” and the Federal Reserve fully understands that this situation cannot be cured in nine weeks or by just a single month of modest price declines.
In response to the question of what to do if inflation does not decline, Wash gave a direct reply:
If inflation is too high and does not decline, the best remedy is to raise interest rates.
2) External Relationships and Independence: Maintain composure and remain free from interference
At the press conference, Walsh emphasized multiple times that the Federal Reserve will not deviate from its mandate due to market or external pressures. He said:
The Federal Reserve will not waver. Our credibility depends on fulfilling our duties and honoring our responsibilities.
When discussing the complex economic environment in recent years, Wosh cited pandemic-induced supply chain disruptions, military conflicts, energy supply interruptions, tariff adjustments, and surging AI investments as key external shocks affecting the economy.
He said the Federal Reserve will not ignore these changes, but is studying whether these shocks will spread further and affect a broader price system.
However, he emphasized that the Federal Reserve focuses on how these events transmit to inflation and the economy, not the events themselves, and that its mandate has always been to make policy decisions centered on price stability and maximum employment.
3) AI capital expenditures have become a key economic variable: growth over the past four quarters has approached 20%.
Regarding macroeconomic highlights, Walsh notably emphasized the real impact of the AI boom on the real economy and prices, which is extremely rare in previous Fed meetings.
Wash disclosed a set of core data:
In the category of high-tech devices and software related to artificial intelligence, the latest data shows a growth rate of nearly 20% over four quarters.
Wash noted that the corporate capital expenditure boom is pushing up prices for "memory and logic chips, as well as related artificial intelligence infrastructure." The Federal Reserve is trying to determine whether these price increases represent merely industry-specific relative price changes or if they will spread to broader inflationary pressures.
We take these shocks seriously. The Federal Reserve is studying how much these shocks are spreading and how much they are affecting prices far removed from direct exposure.
In terms of supply and demand, Wash believes that the Federal Reserve has a relatively sound understanding of aggregate demand, but still faces significant uncertainty regarding aggregate supply, productivity, and structural changes brought about by AI investment.
We are estimating total supply. We are making judgments about productivity; in a sense, there is a race between supply and demand, and the surge in corporate spending on artificial intelligence makes this calculation harder to assess.
He also warned that the AI investment boom will not automatically reduce the Federal Reserve's policy challenges. On one hand, productivity gains and supply expansion may help alleviate inflationary pressures; on the other hand, AI infrastructure development itself could also push up some upstream prices.
4) Policy communication shift: Downplaying forward guidance and urging the market to “follow the data”
Wash once again reiterated that the Federal Reserve is significantly reducing or even exiting the "forward guidance" it has commonly used over the past decade, no longer attempting to micromanage market expectations through dot plots or verbal reassurances.
Wash noted that over the past 42 days (between two meetings), both nominal and real yields on the Treasury yield curve rose significantly, with the increases ranking among the top decile of gains over the past two decades. He attributed this to the Fed’s “retreat”:
Market participants are learning to follow the ball, not the referee; market prices will continue to react in the directions and to the degrees they deem appropriate. In my view, this is a positive development.
In response to reporters' concerns about whether the Federal Reserve might lose control of the narrative, Walsh appeared "not too worried." He stated bluntly:
We tried to stay out of it... we were interested in the financial market's reaction.
He believes that, outside of crisis mode, the Federal Reserve should not tie its own hands but instead need to observe the market’s direct, unfiltered response to developments.
5) Interest rates remain unchanged, but Wash stated, "This is not a pause."
Regarding the decision to maintain interest rates unchanged, Walsh refused to define it as a "pause." In his view, interpreting the policy stance solely in terms of whether the federal funds rate has changed may overlook adjustments that have already occurred in financial markets. He said:
I wouldn't describe our actions today as a suspension. I would describe them as a rigorous review of the economic situation.
Wash said that over the past 42 days, between two FOMC meetings, both nominal and real interest rates across the entire U.S. Treasury yield curve rose significantly, with the magnitude of the move roughly in the “top decile” over the past two decades.
Financial markets did not pause during this intermission; both nominal and real interest rates have risen.
Wash did not directly equate the current rise in market interest rates with the Fed being required to raise rates, but noted that the signals from the bond market show a certain consistency with the performance of the real economy.
Economic output is solid, capital expenditures and productivity are strong, and the labor market is robust and stable. The bond market, including the treasury market, seems to be conveying the same message. Even though we didn’t do much over the past 42 days, the market did quite a bit.
Market reaction
Ahead of the Federal Reserve's interest rate decision, markets maintained a cautious stance while awaiting policy signals, with the U.S. dollar index slightly weakening and U.S. stocks generally declining, led by the Dow Jones Industrial Average. Specifically, the S&P 500 fell 0.61%, the Dow dropped 1.47%, and the Nasdaq declined 0.58%. Gold and silver both rose, reflecting increased risk-off sentiment. U.S. Treasury yields rose slightly across both short and long maturities.
After the announcement, market reactions were pronounced: U.S. 10-year and 2-year Treasury yields both declined, spot gold rose sharply and briefly surpassed $4,100, while stock markets showed mixed performance—the S&P fell 0.2%, the Dow dropped 1.1%, and the Nasdaq turned positive.
Chairman Walsh signaled a "hawkish pause" at the press conference; following the event, the dollar continued to weaken, while the euro and pound strengthened. The U.S. two-year Treasury yield fell 7 basis points to a daily low of 4.2171%, while the 30-year Treasury yield hit a new high since 2007, surpassing 5.2%.
Spot gold rose to $4,100 before quickly narrowing its gains.
At the close, the S&P 500 fell 1.52%, the Dow Jones Industrial Average dropped 2.19%, marking its largest single-day decline since April 2025, and the Nasdaq closed down 1.74%.