July FOMC: Fed Holds at 3.50-3.75% as Payrolls Turn Negative

The Fed held its target range at 3.50-3.75% on July 29 in a 9-3 vote, but the dissent tells the real story: three governors, Hammack, Kashkari, and Logan, wanted a 25bp hike even as July nonfarm nonfarm payrolls fell 23,000, the first monthly contraction of this cycle. That is a central bank pinned between a labor market that just turned and inflation trends that will not fully cooperate.

The payroll number is where this gets uncomfortable. Nonfarm payrolls contracted for the first time this cycle, a sharp reversal from the 148,000 pace in April, and the deceleration through May and June, 63,000 and 20,000 respectively, was already visible before July's outright decline. Unemployment actually ticked down to 4.1% from 4.2% over the same stretch, which is the tell: fewer people employed and fewer people counted as looking for work is a shrinking labor force story, not a strong one.

Inflation is not cooperating either, at least not by the Fed's preferred gauge. Core PCE held at 3.29% year over year in June, and headline PCE ran at 3.67%. Core CPI did ease to 2.47% in July from a run closer to 3% earlier in the year, but headline CPI stayed at 3.30%, still elevated on energy. The FOMC statement pointed to Middle East supply shocks as an inflation driver, a framing that explains why the majority held steady: rate hikes do not fix a supply problem, whatever the three dissenters think.

Underneath both stories, liquidity is loosening. M2 money supply grew 5.53% year over year through June, the fastest annual pace since the 2021-22 surge and a clean reversal from the multi-year contraction of 2023-2024. The Treasury curve agrees: the 10Y-2Y spread has steepened to plus 0.50%, up from flat to inverted a year ago, typically a market signal that a growth slowdown, and eventual cuts, are getting priced in ahead of the data. The 10-year yield itself ticked up 6bp on the week to 4.74%, so bonds are not fully there yet.

Watch the September 15-16 FOMC meeting. It lands just after the next payroll and CPI prints, and a second weak jobs report would make the three dissenters look increasingly isolated. Until then, the accelerating M2 backdrop is the more interesting macro signal than the hold itself.

For more on Fed policy, see our Fed policy hub.

This content is for informational purposes only and does not constitute financial advice. Past performance is not indicative of future results. Consult a qualified financial advisor before making investment decisions.