Fed Holds Rates, Powell Remains Hawkish

FOMC day sparks volatile session. Yields climbed 4-5 bps this morning following higher than expected ADP employment, 2Q GDP, and core PCE data. Price action then reversed course after two Fed voters dissented in favor of rate cuts, only for Chair Powell to fuel a Treasury sell-off shortly thereafter. Powell struck a hawkish tone in his press conference, and yields soared 5-7 bps as a result. Ultimately, the 2-year yield ended 7 bps higher at 3.94% while the 10-year closed 5 bps higher at 4.37%. Equities were mixed, with the S&P 500 down 0.12% and the NASDAQ up 0.15%.

Fed holds rates steady; September still a toss-up. The Fed voted to hold its target benchmark rate between 4.25% and 4.50% today for the fifth consecutive meeting. Fed voters Waller and Bowman dissented in support of rate cuts, the first FOMC meeting since 1993 with more than one dissent. The outlook for September remains uncertain, as traders now see a 47% chance the Fed lowers rates, down from 70% yesterday. Chair Powell pointed to unpredictable tariff-based inflation and classified the Fed’s current policy approach as “moderately restrictive,” which he deemed “appropriate” given that the economy remains strong. He also stated that the Fed will closely monitor upcoming data releases, implying that there will be a much clearer picture of economic strength come the next vote. The FOMC statement with a side-by-side comparison to the last meeting can be read here.

GDP growth exceeds expectations. Second-quarter GDP came in at 3.0% today, surpassing the 2.6% forecast. Rates rose in response to the data, as the Fed has emphasized that a robust economy will allow them to further delay rate cuts. However, after eliminating volatile components such as trade and government spending, final sales to private domestic purchasers tell a different story. This measure, which excludes distortions from swings in trade and inventories tied to uncertain tariff policy, rose by only 1.2% this quarter. That’s its slowest increase since 2022, signaling a cooldown in US demand. Moreover, economic growth for the first half of this year averaged 1.25%, 0.5% lower than the first half of 2024.