What Happened at the Fed this Summer?

Author: Zachary Cady, Ph.D., Senior Economist

Institute for Statistical Policy Analysis

TOPLINE: The Federal Reserve voted 9-3 in July to hold interest rates steady at 3.50% to 3.75%, despite inflation being above 3% since March.

Here is What You Need to Know

Count the Votes: The 9-3 vote is a departure from June’s unanimous vote to keep interest rates steady.

• All 3 of the July dissenters¹ preferred to raise the target range by 25 basis points.
• Many participants in the July meeting noted that monetary tightening is likely to occur if inflation does not subside.

The Iran War’s Shadow: June’s meeting occurred in the wake of the U.S.-Iran Memorandum of Understanding (MOU).

• June participants were concerned with rising inflationary pressures stemming from the Iran War, despite the MOU and market optimism about the war ending at the time.
• Since the June meeting, hostilities have resumed, reigniting (and perhaps intensifying) war-related inflation concerns during the July meeting.

Other Price Pressures and Market Considerations

• The Bureau of Labor Statistics (BLS) did report that the Consumer Price Index for all Urban Consumers (CPI-U) declined by 0.4% in June.
• A separate report found that the Producer Price Index for final demand fell by 0.3% in June.
• The caveat: Despite consumer and producer prices² being lower in June than in May, prices still increased overall across May and June³ and inflation has not been below 3% since February.
• AI-driven demand and tariffs were discussed as potentially inflationary during both the June and July meetings.
• Notably in July, despite surveyed market participants expecting rates to remain the same through 2027 and begin to fall in 2028, market trends themselves revealed expectations of a 25 basis point rate hike by the September FOMC meeting and another hike by the end of the first quarter of 2027.

Optimism: In July, the Committee emphasized solid expansion of economic activity, productivity growth, and capital investment.

Concern: The staff’s outlook overall for economic growth was slightly weaker during the July meeting than it was during the June meeting.

• Some Committee members emphasized the low job-finding rate during both the June and July meetings, while some also pointed to persistent elevation in the long-term unemployment rate during the latter.
• During the July meeting, staff called attention to high asset and equity valuations, as well as an equity premium that has only been lower in recent history during the dot-com bubble.
• In the June and July press releases, FOMC emphasized its commitment to price stability, a statement notably absent from all earlier meetings this year.
• This could foretell a more aggressive approach to rising prices in the coming months if inflation remains stubbornly elevated.

BOTTOMLINE: The July meeting of the Federal Open Market Committee kept the Federal Funds rate steady in the 3.50% to 3.75% range. However, the 3 dissenting votes stand in contrast to June’s unanimous decision to maintain rates and suggest rising concern among members about persistent inflation.

Notes

1. Dissenting members included Beth Hammack, Neel Kashkari, and Lorie Logan. ↩
2. Seasonally adjusted ↩
3. Consumer prices rose 0.5% in May, so over the course of May and June, they still increased on net by 0.1%. Producer prices also rose in May, increasing by 0.6%, so over the course of the same period of time, they still rose on net by 0.3%. ↩