Fed Chair Powell Reiterates Shifting Balance of Risks

Federal Reserve Chairman Kevin Warsh flagged that underlying inflation is not slowing during his speech at the Jackson Hole Economic Symposium. The Chairman reiterated that the PCE price index remains the gauge to be targeted, clarifying doubts from market participants after he downplayed a strict inflation gauge and opted for a more flexible model touted by one of the task forces he created. The Federal Reserve left the federal funds rate unchanged at 3.50%–3.75% for a fifth consecutive meeting in July 2026, in line with expectations, despite markets assigning roughly a one-in-three probability to a rate hike. Three FOMC members dissented for a rate hike. After the decision, Chairman Warsh downplayed the funds rate as the preferred tool to fight inflationary risks in favor of a smaller Fed balance sheet, and continued to criticize forward guidance.

The Federal Reserve’s July meeting minutes showed that policymakers remained concerned about persistent inflation and the possibility that further rate increases could be required if price pressures fail to ease. Several officials judged that financial conditions may not have been restrictive enough, while others noted that tighter market conditions were already contributing to the Fed’s efforts to slow demand. A small group of policymakers who supported raising rates at the July meeting believed an immediate hike could have reduced the need for larger increases later. Officials generally viewed inflation risks as tilted to the upside, although some said financial markets were already doing part of the tightening work. Importantly, the meeting took place before subsequent data showed cooler employment and inflation, meaning the discussion may overstate the degree of tightening currently expected by markets.

The Federal Reserve left the federal funds rate unchanged at 3.50%–3.75% for a fifth consecutive meeting in July 2026, in line with expectations, despite markets assigning roughly a one-in-three probability to a rate hike. Notably, three FOMC members dissented, preferring to raise the policy rate by 25 basis points, which leaves the door open to a rate increase in September. The central bank noted that economic activity is expanding at a solid pace despite elevated uncertainty that owes, in part, to the conflict in the Middle East. Productivity growth and capital investment are strong. Job gains have kept pace with the workforce, and the unemployment rate has changed little. Inflation remains elevated relative to the 2% goal, in part reflecting supply shocks that have driven price increases in certain sectors, including energy. The central bank reiterated its commitment to deliver price stability.