scotiaflash20260729

The Apprenticeship of Kevin Warsh • The policy target rate was unchanged at 3.75%

GLOBAL ECONOMICS • Balance sheet policies stayed the course

• Implied guidance seeks answers that will take longer to arrive than markets are pricing SCOTIA FLASH July 29, 2026 • US Ts steepened as markets doubted the FOMC’s resolve to fight inflation

• History shows Warsh’s deference to bond markets can be exceptionally unwise Contributors The FOMC met our expectations by keeping the fed funds policy rate unchanged at Derek Holt 3.75% and driving a relatively less hawkish market reaction. Guidance offered nothing to VP & Head of Capital Markets Economics reaffirm market pricing for fairly aggressive tightening into year-end which was Scotiabank Economics disappointing to the hiking bias that markets had baked in before the communications. As such, US 2-year Treasury yield rallied by about 9 bps in the aftermath and closed 4– 5bps lower. The 10s yield increased 6–7bps and the 30s yield jumped by about 10bps. In my view, the FOMC did the right thing, but the curve clearly signalled more concern about the FOMC failing to deliver on all of its verbiage about achieving price stability as pushing the short-end yields lower and longer-end higher.

Advice to receive July and September OIS pricing paid off. September OIS pricing was slashed from over 25bps to about 15bps of a 25bps hike priced at present. Cumulative pricing for the remaining three meetings this year was reduced to about +33bps.

I think the main takeaway from today’s communications is that the FOMC is still some way from having answers to key questions that will take months to obtain which at a minimum makes nearer-term hike pricing premature if not entirely offside.

What follows summarizes statement changes and the press conference, and then offers my views.

Simply put, there were no meaningful statement changes except for the dissenters. Otherwise, every single other part of the statement was a carbon copy of the prior statement in June as shown in the appendix.

There were three dissenting hawks who preferred a hike that this meeting. They included Minneapolis President Kashkari, Dallas President Logan, and Cleveland President Hammack. Each of these regional presidents vote for three more times this year and then take a back seat as nonvoters starting in January.

Chair Warsh began his press conference with a few statements before turning to Q&A.

He said "the economy is showing impressive resilience" which was slightly upgraded from the statement’s “solid pace”. He reinforced inflation concerns, saying there is no soft inflation target above 2%, it is 2% period. Warsh emphasized that 5 years of above target inflation cannot be cured in 9 weeks. He also emphasized that nominal and real yields are materially higher across the Treasury curve than they were into the June meeting while sounding at ease toward market gyrations, indicating a bias toward allowing markets to do their work while the Fed observes which lessens market dependence upon the Fed.

Warsh also pointed to strong growth of business investment and the surge of cap-ex but stated this doesn’t necessarily make the Fed's job any easier as the precise timing and magnitude of the effects on the supply side remain hard to predict.

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Warsh noted that the two-day FOMC meeting addressed four main questions:

1. What are the implications of the past five years of high inflation on the current policy conjuncture?

2. The economic shocks of recent years were considered including the pandemic, military conflict, energy shocks, AI surge and tariffs. Do they differ in their effects?

3. We took up the issue of changes in prices and whether they are generalized or narrow.

4. We focused upon monetary policy strategies to achieve price stability.

Expect deeper discussion of these four questions in the FOMC minutes three weeks hence including the likely continued use of language that infers the degree of plurality around the opinions. The rather open-ended nature of these questions and the uncertainty that surrounds them sounds to me like an FOMC that…