The Fed Held Again. Wall Street Can't Agree on Whether the Next Move Is Up or Down

The Federal Reserve did the expected thing on July 29 and then made it look unsettled. It left its benchmark rate at 3.50 to 3.75 percent, a fifth straight hold. Three of its own voting members dissented, each wanting a quarter-point increase, and within a day JPMorgan moved its forecast for the next Fed move to a hike in December. A cut is not off the table. So the market opened August with the question wide open: when the Fed finally moves, which way does it go?

Williams says the peak is already in

The case for holding, and eventually easing, runs through the inflation data and through New York Fed President John Williams. Williams has said inflation has peaked and that policy is well positioned, language that leans toward patience rather than urgency. He expects the annual rate to ease toward 3.25 percent by year-end and to reach the 2 percent target by 2028. To him, the trend already bends down.

The monthly figures give him something to work with. Consumer prices fell 0.4 percent in June, dragged lower by a 5.7 percent drop in energy, and the yearly headline rate eased to 3.5 percent; core CPI, which sets aside food and energy, was flat on the month and stood at 2.6 percent. The Fed’s preferred gauge told a similar story, with headline PCE slipping on the month and the core reading running at 3.3 percent over the year. Growth is cooling alongside it, with second-quarter output up just 1.5 percent. Read that way, the restrictive setting is already doing its job, and the next adjustment is more likely a cut than an increase.

Three dissents and a December hike call

The other reading starts inside the room. Beth Hammack, Neel Kashkari and Lorie Logan each dissented in July in favor of raising rates now. Chair Kevin Warsh, at his second meeting, called inflation above 2 percent unacceptable and pledged to deliver price stability, while saying little about how he would get there.

That gap is what moved JPMorgan. The bank’s chief U.S. economist, Michael Feroli, pulled his forecast for the next Fed move forward to a quarter-point hike in December, from a prior call in 2027, arguing that Warsh’s failure to spell out his plan raised the odds the committee acts to protect its credibility. The inflation numbers support the hawkish read as well. Headline PCE at 3.7 percent and core PCE at 3.3 percent both sit well above 2 percent, and even Williams’s own forecast leaves prices above target at year-end. Williams has named the force he thinks could keep them there. He now calls surging demand tied to artificial-intelligence investment his main inflation worry, and has said the Fed may have to raise rates if that demand keeps building.

What the data shows

The bond market is not treating the question as closed. After the July hold, Treasury yields jumped, sending the 30-year yield to its highest level since 2007, and the Dow fell more than 1,100 points that day. Yields have stayed high since, with the 10-year at 4.68 percent on Friday. Equities, meanwhile, have steadied. The S&P 500 rose 1.15 percent on Friday to 7,576, the Nasdaq added 1.77 percent, and the VIX slipped to 15.6. Stocks are priced for calm while the bond market braces for a Fed that may not be done. Both readings cannot hold for long.

What would settle it

The next two weeks carry the evidence. This week brings the ISM manufacturing survey on Monday, job openings on Tuesday, the ISM services reading on Wednesday, and the July employment report on Friday, with Fed governors and presidents speaking almost daily in between. A hot payrolls number or firm wage growth would arm the dissenters; a soft one would hand Williams his case. July’s CPI arrives in mid-August, and the committee’s own decision lands in September, the meeting JPMorgan is already circling. Until those numbers print, the split stands.

The evidence points both ways. Inflation is off its highs and growth is slowing, which argues for patience. Inflation is also still above target, three officials wanted more now, and a major bank sees a hike by winter. The reports arriving over the next two weeks will start to settle which of those pictures the Fed’s September meeting confirms.

This is a general-market summary for information only — not investment advice, and not a recommendation regarding any security.