Episode summary
Fed in July: A Weaker Case for Hiking
Thoughts on the Market (Morgan Stanley)
· · 11 min · Hosts: Matthew Hornbach, Michael Gapen
Summary
The host and guest argue that the Fed is likely to leave rates unchanged at this week’s July FOMC meeting, with the target range staying at 3 1/2 to 3 3/4%. Their case is that the argument for another hike has weakened since June because payroll growth has slowed and recent inflation data have shown more disinflation, especially in goods and housing-related services.
They say the Fed may prefer to skip July and buy time for more data before the September meeting, when it will have multiple employment and CPI readings in hand. Still, they acknowledge that a hike is possible if policymakers place more weight on higher energy prices, broader inflation risks, or a desire to reset the Fed’s reaction function in a more hawkish direction.
The discussion also focuses on how markets are interpreting the Fed. The host says rising Treasury real yields alongside higher energy prices suggest investors think the Fed will not look through oil-driven inflation. Both speakers say future communication matters: fewer speeches or fewer press conferences could leave a vacuum that markets and private commentary would fill, potentially increasing volatility.
Key takeaways
- The guest says the case for a July hike is weaker than in June because hiring has slowed and disinflation has broadened.
- The host expects the Fed to keep the funds rate at 3 1/2 to 3 3/4% and leave the statement largely unchanged.
- The guest argues the Fed may skip July to gain more data before September, when it will have several payroll and CPI reports.
- The host says rising real yields alongside higher energy prices imply investors expect the Fed to react to oil, not ignore it.
- The guest warns that fewer Fed communications could create a vacuum that markets fill, potentially raising volatility.
Notable quotes
“We expect the Fed to keep the target range for the federal funds rate unchanged at 3 and 1/2 to 3 and 3/4%”
“the case for hikes is not as persuasive now as it was in June”
“Now it looks like there is much less of an acceleration in hiring and momentum has slowed”
“So we do think that there was a lot of evidence that disinflation is here”
“The gap between the July FOMC meeting and the September FOMC meeting is the longest on the Fed's calendar”
How the episode opens
Welcome to Thoughts on the Market. I'm Matthew Hornbach, global head of macro strategy. — And I'm Michael Gapen, Morgan Stanley's chief US economist.
Today, will the Fed hold or hike? It's the question in the market right now. It's Tuesday, July 28th at 9:30 a.m.
in New York. Will the Fed display patience or has it run out of patience? That's the question hanging over the July FOMC meeting currently underway.
We believe the former. We expect the Fed to keep the target range for the federal funds rate unchanged at 3 and 1/2 to 3 and 3/4%. The statement will probably also remain unchanged, reiterating the ample reserve policy, economic activity expanding at a solid pace despite elevated uncertainty.
So Mike, what's your assessment of the situation beyond that?
Our assessment of the July FOMC meeting is actually the case for hikes is not as persuasive now as it was in June. And I think when when we say that and when we come to the decision the Fed will stay on hold this week, we're basing it mainly on the data that has come in since the June FOMC meeting. And two important pieces on that front are employment growth moderated.
So in the June meeting, the three-month average payroll gain was running at about 188,000 per month and I think it gave the sense that the labor market was really accelerating and there was downside risk to the unemployment rate. The subsequent employment data changed that view. Now it looks like there is much less of an acceleration in hiring and momentum has slowed.
So the labor market doesn't look quite as robust. Second, there was a lot of information, we think a lot of signal about disinflation. So yes, recent volatility in the Middle East did push oil prices uh temporarily higher.
From the episode’s captions: roughly the first two minutes, lightly cleaned. Keep watching on YouTube →
Topics
- fed rates
- july hike case
- interest rate decision
- us economic outlook
- macro strategy
Watch the episode
Watch “Fed in July: A Weaker Case for Hiking” on YouTube
Summary, takeaways and quote selection by Octagon. Quotes are short excerpts; the full conversation is in the episode.
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