On July 29, Wednesday, Eastern Time, the Federal Reserve announced after the FOMC meeting that the target range for the federal funds rate remains unchanged at 3.50% to 3.75%.

Thus, after three consecutive rate cuts at meetings up to the end of last year, the FOMC has not made any changes in its five monetary policy meetings since 2026.

The Fed's decision to keep interest rates unchanged was expected, but the level of dissent with three opposing votes exceeded market forecasts. Cleveland Fed's Hammack, Minneapolis Fed's Kashkari, and Dallas Fed's Logan all formally voted against, advocating for a 25 basis points rate hike.

Journalist Nick Timiraos, known as the "New Fed Correspondent," commented that this is the first time since 2016 that three voting members have cast dissenting votes on policy adjustments.

Bob Michele, Chief Investment Officer of Morgan Asset Management, and Jim Bianco, President of Bianco Research, both pointed out that dissenting votes are the core signal for interpreting the policy direction, indicating that upward pressure on interest rates continues to exist.

At the press conference, Wash repeatedly emphasized that the Fed "will not hesitate to act" to curb inflation, stating "we have some important decisions to make." However, what unsettles the bond market more is his position of "not providing forward guidance," requiring the market to judge the interest rate path based on data.

The market faced a threefold shock from the resurgence of war in Iran, the Fed standing pat amid hawkishness, and doubts about AI beliefs. Brent crude surged 8% to return to $90, the 30-year U.S. Treasury yield skyrocketed to its highest level since June 2007, the Dow Jones fell 1153 points, down 2.19%, marking its largest single-day point drop in nearly 15 months, the S&P 500 fell 1.52% to 7316.16, and the Nasdaq fell 1.74% to 24442.94.

The dollar plunged by 0.62%, gold rose by 0.87%, briefly surpassing $4100.

Strongest Hawkish Divergence in a Decade? Fed Stays Pat, Emphasizes Inflation Commitment, but Three Votes Support Rate Hike

The Fed announced on July 29 that it would keep the federal funds rate at 3.50% to 3.75%, marking the fifth consecutive time it has remained unchanged since 2026.

This decision from the Fed aligns with the expectations of the majority of market participants. As of Tuesday's close, CME tools indicated that the probability of no rate hike this week was nearly 70%, with a probability of a single 25 basis points rate hike slightly above 30%. The probability of maintaining interest rates unchanged at the next meeting in September was less than 24%, and by December, the probability of rates remaining unchanged was less than 9%, with at least two 25 basis points rate hikes having a probability of around 58%.

The resolution statement announced this time virtually used the same wording as the last meeting in June.

Like the last time, the statement continues to emphasize that the Fed is committed to achieving price stability. The statement reiterates that conflicts in the Middle East have led to high economic uncertainty, inflation remains high, partially due to rising energy prices, while the economy is steadily expanding and the unemployment rate remains largely unchanged.

This statement copied the evaluation of inflation from the previous statement: "Compared to the committee’s 2% target, the inflation rate is still high, which to some extent reflects supply shocks that have led to price increases in specific sectors like energy."

Compared to last time, this statement has only one major change: the voting results show that among the 12 voting members of the FOMC this year, nine supported keeping rates unchanged, while three opposed this decision. They are Cleveland Fed President Beth Hammack, Minneapolis Fed President Neel Kashkari, and Dallas Fed President Lorie K. Logan. The statement indicates that all three supported a 25 basis points rate hike at this meeting.

This means that one-quarter of this year's FOMC voting members tended to take action to raise rates at this meeting. The dot plot released after the last meeting showed that among the 18 Federal Reserve policymakers providing rate expectations, nine anticipated at least one 25 basis points rate hike this year, with six expecting at least two such hikes.

Journalist Nick Timiraos, known as the "New Fed Correspondent," commented that this is the first time since 2016 that three voting members have cast dissenting votes on policy adjustments.

Timiraos pointed out in his article that this divergence highlights the growing pressure within the Fed, two months after Wash took over as chair, with demands for the Fed to act against inflation, which has been above target for five consecutive years.

Before the resolution announcement, Timiraos indicated that if one or two committee members voted against pausing rate hikes at this meeting, it would clearly indicate that hawkish pressure within the FOMC is building. Previous Fed chairs could soothe potential dissenters by including hawkish or dovish language in statements or hinting at more likelihood of action at the next meeting. However, Wash clearly stated a desire to discard these tools, so he may not have sufficient means to suppress dissent under the table.

The following black text is the same part as the July 2026 FOMC meeting statement, the red text indicates the new additions from July 2026, and the text in parentheses blue text represents the wording deleted from the June statement:

The Federal Open Market Committee voted 9 to 3 (12 to 0) to approve the following statement:

The committee decided to keep the target range for the federal funds rate at 3.5% to 3.75% to support the Fed's dual mandate. The committee will continue to implement (reaffirm) the policy of maintaining ample reserves in the banking system.

Although uncertainty remains high (partly due to conflicts in the Middle East), economic activity continues to expand at a solid pace. Productivity growth and capital investment are performing strongly. Job growth is in line with labor force growth, and the unemployment rate has changed little.

Inflation is still at a high level relative to the committee's 2% target, partly due to supply shocks pushing prices up in certain sectors, including energy. The committee is committed to achieving price stability.

The voting members opposing this monetary policy action are Beth M. Hammack, Neel Kashkari, and Lorie K. Logan, all of whom leaned towards a 25 basis points increase in the federal funds rate target range at this meeting.

Rates Unchanged, but Wash Says “This Is Not a Pause,” 2% Inflation Target Remains Firm

Wash views the rising market rates as a signal that financial conditions are tightening, while reiterating that the 2% inflation target "has no flexibility" and announcing a substantial exit from forward guidance, urging Wall Street to break free from reliance on central bank statements to “capture real economic signals.”

Fed Chair Wash stated that the U.S. economy continues to show resilience amid recent shocks, with growth trends improving, job growth roughly in sync with labor force growth, and little change in the unemployment rate; however, inflation remains "still elevated" relative to the 2% policy target.

On the issue of interest rate paths, which the market is most concerned about, Wash did not provide clear forward guidance. He emphasized that the Fed intends to reduce preset notions and interventions on the market, seeking to obtain more "direct, unfiltered" information from bond, exchange rate, and other prices.

At the same time, he repeatedly reiterated that if inflation remains persistently high during the forecast period, rate hikes "are likely to be part of the solution."

Wash also specifically mentioned that investments related to AI are driving high-tech capital expenditures, but the ultimate impact on productivity, supply capacities, and inflation remains difficult to determine accurately. This means that whether investments and productivity improvements can alleviate price pressures is still a key variable in the Fed's subsequent policy assessment.

1) Inflation Bottom Line: No "Soft Targets," 2% Is the Only Red Line

In the context of more than five years of high inflation, the market once speculated that the Fed might silently tolerate inflation above 2%. Wash shattered this fantasy at the meeting, showing a tough stance against defeating inflation.

Wash made it clear:

“There is no soft inflation target, no soft implicit target—none will be possible during my tenure on this committee. There is only one target, and that is 2%. None of my FOMC colleagues harbors any illusions about this.”

He candidly stated that the patience and impatience the U.S. has experienced has lasted "63 months (inflation above target)", and the Fed understands deeply that this situation cannot be cured in nine weeks or merely by a month of moderate price drops.

When faced with the question of what to do if inflation does not decrease, Wash gave a direct reply:

“If inflation is too high and does not decrease, the best remedy is to raise interest rates.”

2) External Relations and Independence: Maintain Composure, Not Subject to Interference

At the press conference, Wash repeatedly emphasized that the Fed will not deviate from its responsibilities due to market or external pressure. He stated:

"The Fed will not waver. Our credibility depends on fulfilling our responsibilities and delivering on our obligations."

When discussing the complex environment the economy has faced in recent years, Wash listed supply chain strains caused by the pandemic, military conflicts, energy supply disruptions, tariff adjustments, and surging AI investments as significant external shocks impacting the economy.

He stated that the Fed will not overlook these changes but is studying whether these shocks will spread further and affect the broader price system.

However, he emphasized that the Fed's focus is on how these events transmit to inflation and the economy, not the events themselves; its duty is always to make policy judgments around price stability and full employment.

3) AI Capital Expenditure as a Key Economic Variable: Growth Rate Close to 20% in the Past Four Quarters

On macroeconomic hot topics, Wash specifically mentioned the real impact of the AI boom on the real economy and prices, which has been extremely rare in previous Fed meetings.

Wash revealed a set of core data:

“In categories of high-tech equipment and software related to artificial intelligence, the latest data shows that the growth rate for four quarters is close to 20%.”

Wash pointed out that the surge in corporate capital spending has been pushing up the prices of "memory and logic chips and associated AI infrastructure." The Fed is trying to determine whether such price increases are just relative price changes in the industry or whether they will spread to a broader inflation area.

“We take these shocks seriously. The Fed is studying to what extent these shocks are enlarging and how much they impact prices that have yet to be directly affected.”

In terms of supply and demand, Wash believes that the Fed has a relatively reasonable understanding of total demand, but there remain significant uncertainties regarding total supply, productivity, and structural changes brought about by AI investments.

“We are deducing total supply. We are making judgments about productivity, and to some extent, there is a race between supply and demand, and the surge in corporate capital expenditure around AI makes this calculation harder to judge.”

He also warned that the AI investment boom will not automatically reduce the Fed's policy challenges. On the one hand, productivity enhancements and supply expansions may help alleviate inflationary pressures; on the other hand, AI infrastructure construction itself may also push up some upstream prices.

4) Changes in Policy Communication: Downplaying Forward Guidance, Requiring the Market to "Follow the Data"

Wash reiterated that the Fed is significantly reducing or even withdrawing the “forward guidance” commonly used over the past decade, no longer attempting to precisely manipulate market expectations through dot plots or verbal reassurances.

Wash noted that in the past 42 days (between two meetings), nominal and real yields on the Treasury yield curve have risen significantly, ranking among the highest decile over the past 20 years. He attributed this to the Fed's “step back”:

“Market participants are learning to follow the ball, not the referee; market prices will continue to respond in the direction and magnitude they deem appropriate. In my view, this is a positive change.”

When faced with reporters' concerns about whether the Fed might lose its narrative control, Wash appeared "not too worried." He bluntly stated:

“We try to stay out of it... What we care about is the reaction of the financial markets.”

He believes that in a non-crisis mode, the Fed should not tie its own hands but should observe the market's direct and unfiltered reactions to developments.

5) Rates Unchanged, but Wash Says "This Is Not a Pause"

Regarding the decision to maintain rates unchanged this time, Wash refused to define it as a "pause." In his view, if the policy stance is interpreted solely by whether the federal funds rate changes, it may overlook the adjustments that have already occurred in the financial markets. He stated:

“I would not describe our actions today as similar to a pause. I would describe our actions as a strict examination of the economic situation.”

Wash stated that in the past 42 days, or between two FOMC meetings, the nominal and real interest rates across the U.S. Treasury yield curve have risen significantly, and these changes are generally in the "highest decile" among the last 20 years.

“Financial market prices didn’t pause during this meeting hiatus; nominal and real interest rates both rose.”

Regarding the implications of the current rise in market interest rates, Wash did not equate it directly with the Fed needing to raise rates but indicated that the signals conveyed by the bond market align with the performance of the real economy to some extent.

“Economic output is robust, capital spending and productivity are strong, and the labor market is healthy and stable. The bond market, the Treasury market, seems to be expressing the same thing. Even to some extent, while we might not have done much in 42 days, the market has done quite a lot.”

Market Reaction

Before the Fed's interest rate decision announcement, the overall market maintained a cautious stance while waiting for the Fed's policy signals, with the dollar index weakening slightly and U.S. stocks generally declining, led by the Dow. Specifically, the S&P 500 index fell by 0.61%, the Dow fell by 1.47%, and the Nasdaq fell by 0.58%. Gold and silver both rose, as risk aversion sentiment intensified. U.S. Treasury yields rose slightly at both the short and long ends.

After the announcement, the market reaction was notable. The yields on 10-year and 2-year U.S. Treasuries both fell, and spot gold surged significantly, briefly breaking above $4100, with mixed performances in the stock market, the S&P falling 0.2%, the Dow down 1.1%, while the Nasdaq turned positive.

Chairman Wash sent a "hawkish pause" signal at the press conference, and after the conference, the dollar continued to weaken, while the euro and pound strengthened, with U.S. 2-year Treasury yields falling by 7 basis points, refreshing the day's low to 4.2171%, and the 30-year Treasury yield reached a new high since 2007, breaking 5.2%.

Spot gold saw its gains narrow quickly after briefly surpassing $4100.

At the close, the S&P 500 index fell by 1.52%, the Dow Jones Industrial Average fell by 2.19%, marking the largest single-day drop since April 2025, while the Nasdaq fell by 1.74%.

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