Fed Holds at 3.50–3.75%, but Inflation Stays Stubborn

The Federal Open Market Committee left its target range for the federal-funds rate unchanged at 3.50 to 3.75 percent on July 29, opting for continuity even as price pressures refuse to cool. The 9-3 vote, only Chairman Kevin Warsh’s second FOMC meeting as chairman, preserves a policy mix that pairs flat rates with what officials still call “ample reserves” on the balance sheet. Investors responded with skepticism: Treasury yields, already rising for six weeks, extended their climb, while spot gold briefly pierced 4,076 dollars per ounce on Wednesday.

Inside the meeting described in Warsh’s press conference opener, members argued over whether five straight years of above-target inflation have fundamentally altered the neutral rate. Warsh conceded the economy’s “impressive resilience,” noting payroll gains roughly match labor-force growth and unemployment is little changed. That said, he was equally blunt about the price backdrop: inflation “remains elevated,” and there is “only a target, and it is 2 percent.” By keeping the balance sheet broadly accommodative while rates remain unchanged, the Committee is betting that excess bank reserves can coexist with disinflation, a wager some market-minded economists doubt.

Rate markets voiced their own doubts. Since the prior meeting 42 days earlier, both nominal and inflation-adjusted Treasury yields have risen into the top decile of two-decade ranges, a move Warsh attributed to traders finally “playing the ball, not the referee.” With formal forward guidance now scarce, investors have had to rely on incoming data, and most releases have pointed to sticky services prices and strong capital spending. That capital spending boom, driven by nearly 20 percent growth in artificial-intelligence hardware and software, has kept manufacturing output solid despite higher borrowing costs.…