July Fed Meeting: The market assumes that Warsh will maintain the rates
27 JUL, 2026
The Fed meeting on the upcoming 28th and 29th of July comes at a time of deceptive calm. US inflation continues above the central bank's target, but the latest data from June surprised on the downside, easing pressure on the Federal Open Market Committee (FOMC).
Investors highly anticipate that interest rates will remain unchanged, in what would be the second consecutive meeting under the leadership of Kevin Warsh without apparent shocks. However, beneath this stable surface coexist risks of different signs: energy, tariffs, and spending on artificial intelligence (AI), which could reactivate volatility in the coming months.
What is expected from the Fed meeting on July 28th and 29th?
The consensus among the managers consulted is clear: there will be no movement in interest rates at the July meeting. Christian Scherrmann, chief economist of DWS for the United States, summarizes the situation by stating that "there is no reason to expect a change in interest rates at the next meeting", as inflation has moderated due to falling energy prices and the fading of tariff effects, without relevant wage pressures in the labor market.
Damian McIntyre, head of Multi-Asset Solutions at Federated Hermes, agrees that the June CPI, which fell to 3.5%, moved away from the most adverse scenario for investors. McIntyre recalls that in August the Jackson Hole symposium is held without a FOMC meeting, so Warsh and the committee will have almost two months until September 16th to decide the course of the rates. Roger Rüegg, head of Multi-Asset Solutions at Zürcher Kantonalbank (Swisscanto), adds that this second meeting under the mandate of Kevin Warsh will probably be of little relevance in terms of surprises.
Why have Fed surprises stopped moving the markets?
Tiffany Wilding, economist at PIMCO, points out that "one of the most interesting events in the interest rate markets this year is what has not happened": despite one of the biggest restrictive monetary policy surprises in recent history at the June meeting, long-term forward rates barely moved. Wilding attributes this phenomenon to two factors: a change in the way Warsh communicates and a transformation in what the market believes drives current inflation.
According to the framework developed by Gürkaynak, Sack and Swanson, monetary policy surprises cease to be noise and become signals about the Fed's future reaction function. Wilding explains that, after the pandemic, the macroeconomic environment has been dominated by supply shocks rather than demand shocks, which reduces the sensitivity of long-term rates to specific FOMC decisions. This would explain why the real forward rate 5 years from now barely reacted in June.
What role do tariffs and energy play in inflation?
Tariffs and oil concentrate much of the debate. Scherrmann (DWS) expects the dominant issue to be the reinstatement of certain tariffs following the Supreme Court ruling, although he does not anticipate that the average tariff rate will exceed previous highs, which would maintain some disinflationary force. In parallel, he considers the situation with oil to be more complex, as recent spikes remind of the movements recorded at the start of the war conflict.
McIntyre (Federated Hermes) agrees that the oil's retreat after the April surge explains much of the drop in the CPI to 3.5%, although he warns that inflation continues to show notable persistence in the rest of the components. Both managers suggest that Warsh could trust that the moderation of housing inflation, or the disinflationary forces associated with AI, will eventually facilitate the central bank's task without the need to raise rates.
How does AI spending affect monetary policy?
Spending on AI infrastructure emerges as a novel factor in the debate. Wilding (PIMCO) points out that rapid investment in this area has generated bottlenecks in semiconductors, data centers, and capital goods, which would also be driving aggregate demand. Scherrmann (DWS) clarifies that, given the reduced weight of these components in the CPI, their direct impact on prices would be minimal, and that Warsh maintains a dovish stance considering that AI will expand the supply capacity of the economy in the medium term.
For Scherrmann, this view fits with the idea of a Fed "more rational and analytical", less prone to act on the basis of speculation. However, he acknowledges that weaker arguments have increased, linked to external factors such as tariffs and energy, and that dissenting voices may emerge within the FOMC calling for higher rates.
What implications does it have for the dollar and fixed income?
Rüegg (Zürcher Kantonalbank) considers the market expectations that discount two rate hikes before the end of the year to be exaggerated, although he does not anticipate receipts to decrease. In his opinion, "we consider the market expectations, which foresee two interest rate increases before the end of the year, to be exaggerated". The dollar has strengthened due to these expectations, but Rüegg expects this momentum to be temporary and that the currency will weaken against the Swiss franc in the second half of the year.
Wilding (PIMCO), for his part, concludes that the combination of high returns and a more volatile macroeconomic environment makes high-quality bonds attractive from a risk-adjusted perspective, especially if the higher frequency of supply shocks coexists with a weaker future orientation from the Fed.
Conclusion
This week's Fed meeting is shaping up to be a smooth procedure in the reference rate, but it does not clear up the fundamental doubts. The real debate is no longer in this month's decision, but in how Warsh redefines the Fed's reaction function to an inflation increasingly dominated by supply shocks (tariffs, energy, AI) instead of traditional demand. This reinterpretation, more than the meeting itself, will determine whether long-term rates continue to be immune to short-term surprises.
