Fed Leaves Rates Unchanged – Dovish Shift Emerging
The Fed held rates steady yesterday, keeping the Fed Funds Rate at a range of 4.25% to 4.50%, as expected. But there was a notable development: two Fed Governors, Waller and Bowman, dissented and pushed for a rate cut. This marked the first time in 32 years that two Fed Governors have dissented in the same meeting—clear evidence that more members are leaning dovish.
The Fed’s statement acknowledged that economic activity “moderated” in the first half of the year, a downgrade from the previous description of “solid” growth.
During the press conference, Fed Chair Powell said the slowdown is largely due to weaker consumer spending. He also addressed GDP distortions from tariffs on imports, noting that Q1 and Q2 should be considered together. Powell estimates combined annualized growth at just 1.2%—a soft reading.
He also noted that tariffs may be a one-time price shock, not a long-term inflation driver. On the labor market, Powell highlighted that once the BLS’s data is revised through the QCEW, we may be seeing close to zero private-sector job growth. If accurate, that’s another reason to ease up on policy sooner rather than later.
Recent data from Bank of America also shows cracks forming: spending on services (hotels, airfares, dining) has dropped three months in a row—the first time we’ve seen that since 2008. Lower-income households are also pulling back on credit card use. With monetary policy working on a lag, the Fed risks being behind the curve if they wait too long to act.
PCE Inflation – Slightly Hotter, but Within Expectations
The Fed’s preferred inflation gauge, Personal Consumption Expenditures (PCE), showed:
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Headline PCE rose 0.3% in June (as expected)
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Year-over-year: 2.6% vs. 2.5% expected (due to prior revisions)
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Core PCE (excluding food and energy): +0.3% month-over-month and 2.8% year-over-year
While monthly numbers came in line, the short-term trends were a bit hotter:
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3-month Core PCE annualized: 2.6% (up from 2.0%)
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6-month Core PCE: 3.1% (up from 3.0%)
Still, both metrics have cooled significantly since February, when they ran at 4.1% and 3.4%, respectively.
Personal Income rose 0.3% (a bit stronger than expected), while Spending rose 0.4% (a bit weaker).
The Bond market took the report in stride. However, it will be tough to see meaningful progress on Core inflation through year-end—especially with lower upcoming monthly replacements and potential short-term price impacts from tariffs.
Jobless Claims – Mixed Signals from the Labor Market
Initial Jobless Claims ticked up slightly last week, rising 1,000 to 218,000—still historically low. But Continuing Claimsremain elevated at 1.946 million, flat from the prior week and now above 1.9 million for ten straight weeks.
The takeaway? Layoffs remain low, but rehiring is slower. Workers who lose their jobs are staying unemployed longer—a sign that hiring demand may be softening.