WEEK ENDING 7/31/2026
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- Fed leaves rates unchanged for 7th straight month
- New chair floats new rules: fewer meetings and less guidance
- Q2 GDP growth of 1.5%
A CITY DIFFERENT TAKE
The Federal Reserve maintained its interest rates for the seventh consecutive month with a 9–3 vote. Last year, there were three rate cuts in the final quarter.
The initial expectation for this year was continued rate cuts, but persistently high inflation has slowed that momentum. Part of the rise in inflation has been linked to the ongoing conflict with Iran.
Last week, three dissenting policymakers — Lorie Logan, Neel Kashkari, and Beth Hammock — advocated for a quarter-point increase. June's core PCE increased only 0.13% month-over-month, a notable surprise on the downside, but the annual rate remains 3.3%, and the three-month annualized rate is 2.9% — both well above the target.
The Fed indicated that one soft month doesn't offset five years of overshoot, and two more CPI reports before September could change the narrative. While the report reduces some pressure, it doesn't resolve the underlying issues. Lower Brent crude prices in June helped ease inflation, a trend likely to continue into July.
Chair Warsh underscored that the Federal Reserve would deliver price stability. The press, however, does not believe him. The Fed chair and the press were talking past each other in July’s press conference. The press views the market setting interest rates above the Fed funds rate as a criticism of the Fed, which has gone soft on inflation. There is a lot of criticism currently on how the Fed is choosing to communicate with the market. Abandoning the practice of a presser (like in the Greenspan era) is not sitting well with the market.
Traders see a 70% chance that the Federal Reserve will hike interest rates by a quarter point in its September meeting. Another hike is fully priced in for October.
A clear example of this Fed's communication gap is the confusion over which inflation measures truly reflect inflation. During the July FOMC meeting, the same report presented varied figures: headline PCE at 3.7% YoY, core PCE at 3.3%, and the Dallas Fed's preferred trimmed-mean measure at only 2.2%. Meanwhile, the Atlanta Fed's sticky/flexible readings showed 2.8% and 5.1%. All these figures are technically correct depending on the methodology, but the committee was essentially faced with choosing between “the 3.7% figure representing the economy and the 2.2% figure” when deciding on a potential hike. The resulting gap of 150 basis points is exceptionally large by historical standards.
But this meeting was not just about poor communication from the Federal Reserve — there was a real ambiguity.
The committee is genuinely split on which inflation number to trust. We read this month’s meeting as a hold with hawkish tilt.
Federal Reserve Chair Kevin Warsh suggested the Fed should consider changing how often it holds regular policy meetings. This would be a notable shift from the eight-meeting schedule it has maintained since the early ‘80s, aligning with the trend of issuing shorter statements, hosting fewer press conferences, and overhauling the task force since Warsh took charge. Fewer meetings would reduce the number of opportunities for the Fed to make incremental policy adjustments, increasing the likelihood of larger, more impactful moves when it does decide to act. It would also focus market attention and volatility around fewer dates. Along with more ambiguous guidance, this suggests the Fed might announce less frequently but be more decisive when it does.
Let’s move on to growth. Q2 GDP at 1.5% looks unremarkable — but private domestic final sales surged 3.9%, driven by consumption and investment in equipment/intellectual property products.
Business investment (+8.4% non-residential fixed investment) is broadening well past AI data centers. Industrial equipment investment posted its biggest jump since 2011, and transportation equipment followed with its biggest jump in two years. The two drags on headline GDP net exports (-1.0pt) and inventories (-0.67pt) are largely mechanical, not signals of weak demand. Broadening capex and firm domestic demand hand the Fed cover to hike without derailing growth. Concerns about stagflation arise if the consumer confidence fades in the second half.
CHANGES IN RATES
TreasuryMarket
Treasury yields were higher for the week. The 2/10 spread is at 44 basis points. The longer tenors of the Treasury curve steepened versus a week ago.
MunicipalMarket
AAA general obligation municipal bonds were higher in yield across the maturity spectrum. The 2/10 slope is at 61 basis points, much flatter than last week.
Selected Municipal AAA General Obligation Bond / Selected Treasury Bonds Yield Ratio
AAA general obligation bonds have not moved much in the last week.
Investment Grade Corporates
Investment-grade corporate yields have marginally climbed up in the long end. The 2/10 spread is stable at 96 basis points.
THIS WEEK IN WASHINGTON
The conflict with Iran resembles a tumultuous teen relationship, fluctuating unpredictably.
Trump has paused new strikes after Tehran, Oman, and Saudi Arabia hinted at a potential deal to reopen the Strait of Hormuz. That deal is contingent on finalizing terms quickly, including reopening the Strait fully and ending Iran's nuclear ambitions.
This pause follows Iran's ballistic missile attack on a U.S. base in Jordan this week, breaking a recent calm. Saudi Crown Prince Mohammed bin Salman urged Trump to de-escalate. Iran's foreign ministry stated talks with Oman on a new shipping route through Hormuz were in their "final stages," though state media depicted Trump's pause as a retreat. Iran's Araghchi warned regional partners against military cooperation with the U.S. Israel, part of the larger conflict but not involved in the June peace deal, remained skeptical whether diplomatic efforts would lead to a concrete agreement.
The president indicated that the Iran talks would start this Monday.
WHAT, ME WORRY ABOUT INFLATION?
The graph above contrasts a 5-year Breakeven Inflation Rate (this is the market-implied inflation rate) tracked weekly with the core PCE inflation rate. The 5-year Breakeven Inflation Rate finished the week of July 31 at 2.26%. The 10-year Breakeven Inflation Rate finished the period at 2.28%. Both these numbers are marginally higher week over week.
MUNICIPAL CREDIT
The 10-year quality credit, which is the difference between BBB revenue bonds and AAA general obligation bonds, was at 0.84% versus a long-term average of 1.67%.
TAXABLE CREDIT
Investment-grade spreads for the past week were at 95 basis points. The long-term average for investment grade is 1.55%. High-yield credit spreads are 2.74% versus a long-term average of 4.51%
WHERE ARE FIXED-INCOME INVESTORS PUTTING THEIR CASH?
Money Market Flows (millions of dollars)
Money market fund flows were negative across the board, except for tax-exempt money market funds.
Mutual Fund Flows (millions of dollars)
Mutual fund cash flows were generally negative for the week, except investment grade.
ETF Fund Flows (millions of dollars)
Net ETF flows were negative week over week.
SUPPLY OF NEW ISSUE BONDS
This week’s calendar is $17+ billion. This is a very large calendar — the fifth largest for the year.
CONCLUSION
This month's data paints a picture of a Fed navigating real ambiguity rather than simple miscommunication, genuinely split on which inflation gauge to trust (a 150bp gap between headline PCE and trimmed-mean alone). The Fed held rates for a seventh straight month on a 9-3 vote with three dissenting votes pushing for a hike (now reportedly considering fewer, higher-stakes meetings that would concentrate market volatility around fewer dates, even as guidance grows vaguer)
Underneath that, growth gave the Fed room to act: Q2’s 1.5% headline undersells an economy where final sales to private domestic purchasers ran at 3.9%, CapEx broadened well beyond AI data centers into industrial and transportation equipment, and the drags on GDP (net exports, inventories) were mechanical rather than demand-driven. All of which supports the market's 70% pricing of a September hike and a fully priced October move.
The wildcard is the Iran conflict: crude's slide in June helped core PCE surprise to the downside, and Trump's decision to hold off on new strikes pending a Hormuz reopening deal offers a path to further disinflationary relief if it holds but the truce is fragile (prior pauses have already collapsed once this cycle), and a breakdown would reverse the energy tailwind just as the Fed is trying to prove its inflation resolve.
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