Fed remains on hold thanks to June’s cooler inflation readings

Executive summary

Federal Reserve (Fed) policymakers kept rates unchanged in a range of 3.50% – 3.75%, which was in-line with our expectations for today’s decision. Nine members of the Federal Open Market Committee (FOMC) voted for no change while three voters favored a rate hike in contrast to the unanimous hold at the previous meeting. The official statement was once again extremely short and virtually unchanged from the June release.

The three hawkish dissents suggest that there is a growing bias among Fed officials that tighter policy may be needed. The cooler-than-expected June inflation data provided sufficient comfort for policymakers to hold rates steady. We still believe that the bar for a rate hike in 2026 remains high based on current conditions; however, today’s dissents are notable.

Chairman Warsh emphasized the Fed’s commitment to meeting its 2% inflation target and firmly stated, “We will not hesitate to act.” Additionally, Warsh clearly expects to offer less forward guidance relative to prior Fed regimes.

U.S. stocks trimmed earlier declines following the announcement. The S&P 500 still finished down roughly 0.8%. The 2- year and 10-year U.S. Treasury yield declined to 4.23% and rose to 4.67%, respectively. 

What happened

At its July rate-setting meeting, the Federal Open Market Committee (FOMC) maintained the target range for the federal funds rate at 3.50% – 3.75%—maintaining the same setting in place since December 2025. There were three dissenting voters to the decision, each in favor of raising the policy rate 0.25% at this meeting. There were no other policy changes.

In his second press conference at the helm, Chairman Kevin Warsh delivered a hawkish tone and reiterated the Fed’s commitment to deliver price stability after five years of inflation above the Fed’s 2% objective. He noted that inflation will not be cured by a single month of price decreases and that the committee will not hesitate to act, implying that future rate hikes are on the table if oil-related inflation persists.

Warsh shared that the committee focused on several crucial questions regarding today’s policy decision, which included the implications of the past five years of high inflation, considerations around economic shocks and subsequent price increases, strained supply chains, geopolitical tensions, and monetary policy strategies for achieving stable prices.

The Chairman also noted that some of the increases in nominal and real interest rates between FOMC meetings are significant, stating that the reduction in forward guidance from the committee is leading prices to react in real time to economic developments and incoming data. The lack of guidance and market’s “reaction function” to economic data are key differences in the nascent Warsh era.

Our take

As we expected, the Fed is choosing to remain patient. To wit, the dramatic drop in crude oil prices during May and June quickly led to sharp declines in the key inflation metrics in June. However, the three dissents in favor of a rate hike today suggest the Fed’s consensus is taking an incremental step towards tighter monetary policy. Still, the majority decided to hold rates steady today.

The statements made during Warsh’s press conference maintained an emphasis on taming inflation. Despite the decision to keep rates unchanged, Warsh stated that each meeting going forward will be viewed as a fresh opportunity to assess economic conditions based on incoming data, further underlying a hawkish lean. Some policymakers are increasingly concerned over oil-induced inflation and the uncertain outcome in the Middle East.

Alas, we concede that our view—that the Fed is in the midst of an extended pause—is different from the current market consensus that the Fed will raise the Fed funds rate by 0.50% by mid-2027. We maintain our belief that monetary policy is somewhat restrictive, particularly in combination with elevated prevailing rates (e.g., the 10-year U.S. Treasury yield at roughly 4.67%). Moving forward, Fed expectations and U.S. Treasury yields will remain highly sensitive to developments in the Middle East. We still believe that the bar for a rate hike in 2026 remains high based on current conditions, but the Strait of Hormuz’s closure presents a real risk.

Bond market implications

Since the Fed’s June rate decision, U.S. yields have pushed higher in response to reescalation in the Middle East that has left shipping traffic through the Strait of Hormuz severely disrupted. Across the U.S. Treasury curve, yields have risen 15-20 basis points (0.15-0.20%) over the past six weeks. The longest-dated region of the yield curve experienced the largest move. The 30-year U.S. Treasury yield reached its highest point since 2007, while short-dated and intermediate yields hit their highest yields since early 2025. These elevated yields reflect investors’ considerations in several areas: the potential for increased Fed hawkishness, oil-induced inflation, government spending and borrowing, and the ongoing resilience in the domestic economy.

In the trading hours ahead of today’s FOMC rate announcement, yields drifted higher based on overnight reports of an attack on American troops in Jordan to which the U.S. pledged a harsh response. However, once the committee’s official decision was released, yields initially fell in response to the ‘no change’ in policy. The Fed’s concise statement preserved its focus on restoring 2% inflation over the employment side of the Fed’s dual mandate. Still, federal funds futures trading reduced the projected probability that the Fed will raise rates in the very near term.

During Chairman Warsh’s press conference, short-dated yields declined, questioning whether the Fed would follow through on interest rate hikes; however, yields beyond 10-year maturities continued to rise, suggesting the market is still assessing the Fed’s strategy to fight inflation. As Warsh exited the stage, 2-year and 10-year U.S. Treasury yields were trading at roughly 4.23% and 4.67%, respectively, which are now approximately 76 and 51 basis points (0.76%; 0.51%) higher year to date.

U.S. Treasury yields, which are the primary driver of core fixed income yields in general, remain above our assessment of fair value. In late March, we upgraded our view of duration from neutral to more attractive as yields rose in response to the conflict with Iran. For portfolios concentrated in cash, very short-dated fixed income instruments (e.g., U.S. Treasury bills, money market mutual funds), or positioned below benchmark duration, the recent rise in yields creates a compelling entry point to add intermediate and longer-dated exposure. The 1- to 10-year maturity range offers a compelling balance of attractive income and moderate interest rate risk. We expect interest rate volatility to stay elevated in comparison to the benign rate environment of late 2025.

Bottom line

Despite holding rates steady, the Fed delivered a hawkish-leaning signal by projecting a readiness to tighten if needed and revealing three dissents to the decision in favor of raising the federal funds rate. Fed Chairman Warsh reiterated that the market should adjust to less forward policy guidance moving forward. While our view that the Fed will avoid a rate hike this year is out of consensus, we maintain that policy remains somewhat restrictive and the bar for hikes in 2026 is still high, though today’s three dissents in favor of a hike are a notable development.