Weekly Update 07/31/2026: Federal Reserve Keeps Rates Steady
- Coke is it
- Boeing surprises with free cash flow
- Rheinmetall reports surge in sales
- BAE Systems increases free cash flow guidance
- Microsoft rockets higher
- PCE above target
Gross Domestic Product
The US economy grew at an annualized 1.5% pace in the three months ended June, according to the Bureau of Economic Analysis (BEA). This was below the 2.0% pace expected in a Bloomberg survey of economists and less than the 2.1% pace from the first quarter. Consumer spending, which comprises about two-thirds of economic activity, rose at a 3.2% rate thanks to a slide in gasoline costs at the end of the quarter alongside higher-than-usual tax refunds to support household spending. Net exports subtracted a percentage point from the calculation of GDP, suggesting that importers rushed to get goods into the country before a new wave of tariffs hit. A fall in inventories also reduced GDP. It is somewhat counterintuitive, but a decline in goods reduces final output because GDP measures what is produced during the period. As shelves get emptied and factories gear up to replace items, then that production will be included in future periods.
Nonresidential fixed investment rose at an 8.4% pace. Investment in industrial equipment surged by the most since 2011, reflecting the massive spend for building data centers and information processing equipment. Residential investment added to growth for the first time since late 2024 as some buyers used a slight dip in mortgage rates during the period to close deals in an otherwise moribund housing market. The last component of GDP, government spending, fell. This was a bit of a technicality as it reflected sales of crude oil from the Strategic Petroleum Reserve. But because sales of oil are reflected in other components, there is “no direct effect” on GDP according to the BEA.
Personal Consumption Expenditures
The PCE was released Thursday morning, and all investors were focused on it given the Fed uses it as its benchmark for inflation measurement. In June, according to BEA data, the PCE index fell 0.1% month-to-month, which was a large deceleration from the 0.4% growth seen in May. That translated into a 3.7% annualized pace from a year ago, matching the consensus estimate in a Bloomberg survey of economists. When the more volatile food and energy categories are excluded, the so-called core PCE rose 0.1%, below the 0.2% expected pace. On an annualized basis, the core rose 3.3%, slightly below the 3.4% annualized pace in May. On a one-, three- and six-month basis, core PCE has cooled, though some of that is because May’s figures were revised higher.
Goods inflation picked up with increases in computer software, sports and recreational vehicles and toys. However, recreation services, like gambling and movie admissions and live entertainment, fell in June outside of World Cup-related activities, which could signify consumers are pulling back on discretionary spending. The data is leading to one conclusion: spending growth has outpaced real income growth. After rising 0.9% in May, personal spending rose 0.3% in June. Meanwhile, personal income rose 0.2% in June after a 0.7% rise the month prior. There was a brief respite in gasoline prices as a tentative ceasefire in the Middle East helped the pocketbooks of drivers. However, renewed hostilities in the Middle East have seen Brent crude, the global benchmark, rise 22% so far in the month of July with U.S. crude prices not much better, up 21% in that period. With the World Cup now over, tax refunds mostly spent and Amazon Prime Day pulled forward, the question arises if consumer spending strength can persist into the second half of the year. Initial jobless claims from the Labor Department remain near 40-year lows with claims in the week through July 25 of 197,000 well below the 219,000 reading in the comparable week a year earlier. With few signs of broad-based layoffs, consumers may be able to shoulder spending awhile longer, but we will need to see a significant and sustained pickup in actual job creation for this year’s holiday season to be filled with joy for the economy.
The Fed
The Federal Open Market Committee (FOMC) decided to leave its benchmark federal funds rate unchanged in the range of 3.50%-3.75%. Three Fed presidents voted for a quarter-point rate hike—Beth Hammack of Cleveland, Neel Kashkari of Minneapolis, and Lorie Logan of Dallas. It was the first time since 2016 that three officials dissented in the same direction over a policy change. Fed Chairman Kevin Warsh had mentioned in various talks that he was looking forward to a “family fight” during the FOMC meetings where diverging views would be not only accepted but encouraged for the Fed to achieve its dual mandate of full employment and stable prices. At last month’s meeting, about half of the officials thought a rate increase would be warranted later this year, as shown in the dot plot of future projections, which are released only at meetings which coincide with the end of calendar quarters. While the most recent consumer price index and producer price index helped ease pressure on the Fed to raise rates, this week’s PCE data plus a national average of $4.10 per gallon of gas renewed the sense of urgency, which Warsh does not seem to have based on his comments during the post-meeting press conference. “I hear from you what I hear more broadly from households and business: Impatience. ‘Deliver it already,’” he said in a response to one question. “The suggestion that we’re going to be able to do it with our magic wands is one I want to disabuse you and everyone else of.” The market’s response: a steepening of the yield curve, which sent the 30-year Treasury bond yield above 5.23% (its highest yield since 2007) and a slide in equity markets as his comments wrapped up near the end of trading on Wednesday. It might be a stretch to blame the decline and spike in yields solely on Warsh in the midst of heightened volatility around earnings reports, but it likely played a role.
The issue is that the market is not going to have patience. Warsh has asked for five task forces to review Fed policy in these areas: communications, balance sheet policy, data, productivity and jobs and inflation frameworks. When a committee, which is the FOMC, looks to five other committees, it suggests that answers are not coming anytime soon. For households, that means relief on mortgage rates or other borrowing costs is no longer a short-term hope. The Fed paused its rate reduction path in December based on fears of a labor market slump, which has yet to arrive. Instead, inflation has been stuck near 3% or higher for years. This is the real issue. Warsh said the Fed, which is now his Fed, is “in the performance business,” insisting there is “no soft inflation target.” Yet, there has been no movement towards bringing inflation down to the 2.0% target (“not a whisper more” according to Warsh). If there's one thing the Fed cannot afford, it’s a credibility gap.
At the end of the day, the Fed is trying to make the right decision. We will chalk up Warsh’s comments this week as one to learn from—he is not the first and probably won’t be the last Fed chair to stumble in his first meeting or two under the hot lights of the financial press corps. The Fed next meets on September 15-16. Before that, Warsh is expected to give a speech at the Jackson Hole, Wyoming symposium scheduled for next month. Previous chairs have used that occasion to lay out their vision or unveil new policy. When asked, Warsh said he had not prepared his speech yet, hoping to have feedback from one of his task forces by then. The path for the Fed not to do anything at its next meeting has narrowed. With the “family fight” resulting in a few disgruntled uncles and aunts and the calendar between now and September filled with data points, the market is expecting more reasoned action to either support the hawkish tones being uttered or lay out a path to why staying put makes fundamental and common sense. Stay tuned!
Company Events
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