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JOE KALISH, CHIEF MACRO STRATEGIST

FIXED INCOME | FOCUS JULY 27, 2026

Will the FOMC choose inflation? KEY TAKEAWAYS This week’s meeting is underpriced for a rate hike. We list ten reasons why. We also present six reasons why the FOMC might wait. The Fed’s primary job right now is to keep inflation expectations well anchored. Talk needs to be backed up with action to limit second-round effects. Should be an interesting discussion and a close decision.

On several occasions, Fed Chair Warsh has proclaimed that “inflation is a choice.” I hope that phrase doesn’t come back to haunt him. What will the FOMC do this week? Will it choose to fight inflation or let the risks linger? Our view has been that the Fed will hike rates by September at the latest. That puts this week’s meeting firmly in play.

Why the Fed should hike rates this week

1. The market is already pricing in rate hikes for 2026. Here were the CME odds of a rate hike as of Friday:

38% for July 85% for September 89% for October (nobody sees the Fed hiking right before the midterms) 93% for December for one hike and a 60% chance of two hikes

My view is that this week’s meeting is underpriced for a rate hike.

In his first press conference as Fed chair, Warsh explained why he valued market pricing without forward guidance. The market expects the Fed to hike by September.

Why wait? First, monetary policy operates with long and variable lags on the real economy. If the FOMC waits over four months until after the midterms to hike, the impact will be felt in 2028 during the next presidential election year. Getting the hike out of the way now, reduces the political impact on both the midterm and presidential elections.

1. The Trump administration is giving Warsh a free pass – why not take it? 2. Cement Fed independence – A rate hike this soon into Warsh’s tenure would demonstrably show the Fed’s independence. 3. Enhance Fed credibility - Talk is cheap if not backed up by action. Inflation has been above the Fed’s target for over five years. By acting now and sounding hawkish, the market can do more of the work for the Fed, so the Fed can do less. But Warsh needs to show they are willing to raise rates. Warsh admired former Fed Chair Greenspan, who was willing to let the economy run a bit hotter due to the rapid increase in productivity. But Greenspan had already established that he was an inflation fighter by aggressively hiking rates in 1994, once in 1997, and six times from 1999-2000. Warsh cannot run on Greenspan’s record. He needs to establish his own. 4. Capex plans even stronger – Since the last FOMC meeting Alphabet and Meta have each boosted their capex plans, along with continued strong investments from Tesla. 5. Energy prices have rebounded on renewed Mideast tensions. Inventory levels, however, are more depleted, the Red Sea alternative is now questionable, and China may resume its imports after it ran down its inventories. 6. Tariffs back on – Although peak tariff impacts are likely behind us, the expiration of the Section 122 tariffs on Friday are being replaced with new tariffs.

Ned Davis Research NDR.COM Please see important disclosures at the end of this document. 1

7. Labor market is solid and not an obstacle to a rate hike – The unemployment rate is consistent with the Fed’s longer run estimate, which is viewed as its measure of full employment. 8. Policy isn’t restrictive – Except for housing and subprime borrowers, it’s hard to argue that policy is restrictive. Using the 5-year inflation swap, the real policy rate is 1.2%. By some measures, real rates are negative and stimulative! 9. Buys the Fed time until the task forces report back to the Committee.

1. Core CPI inflation eased in June – Core, median, trimmed-mean, and core ex-shelter all fell y/y, with core ex-shelter exactly at 2.0% y/y. Core CPI services ex-shelter (super-core), however, was still up at 3.1%. This is all backward-looking data. The Fed needs to look forward. 2. Shelter costs have been easing – Nevertheless, there are signs that the downtrends in shelter, rent, and OER have run their course. Even the Zillow Rent Index appears to have bottomed. 3. Inflation expectations are well anchored – This is…