This week included the much-anticipated Federal Open Market Committee meeting concluding on July 29th. The Federal Reserve held its policy rate at 3.5%-3.75%, with three officials dissenting in favor of a quarter-point hike. The official press release announcing the decision was abbreviated, highlighted strong productivity growth and capital investment, and noted the impact of energy supply shocks on inflation. In his press conference, Chair Walsh said the Fed will “not hesitate to act” to meet its 2% inflation target, while avoiding forward guidance on the path of monetary policy.

Second quarter Gross Domestic Product (GDP) growth cooled to an annualized 1.5% from 2.1%, below consensus, but the composition told a stronger story. Personal consumption accelerated to 3.2%, and combined household and business demand rose 3.9%, while lower government spending and higher imports accounted for the entire shortfall. Labor data pointed in the same direction, with the Employment Cost Index rising 0.9%, unchanged from the prior quarter. Against that firm backdrop, June Personal Consumption Expenditures (PCE) inflation moderated to 3.7% year over year from 4.1%, and core PCE eased to 3.3% from 3.4%. Notably, the monthly PCE numbers were soft, with headline PCE at -0.1% and core at 0.1%. Both measures remain well above the 2% target on an annualized basis, with the recent improvement linked to lower energy prices during the temporary truce with Iran.

Markets reacted to the Fed decision and recent economic data with long-maturity Treasury yields rising and equities declining. The 30-year Treasury yield rose approximately 10 basis points Wednesday to above 5.20%, its highest since 2007, while the S&P 500 declined 1.52% as investors read the hold as a delayed response to inflation. Slower second quarter growth alongside cooler core inflation, paired with strong technology earnings, drove a rebound Thursday. Friday’s Chicago Purchasing Managers’ Index at 57.6 pointed to renewed economic strength, which pushed yields higher and capped the equity rebound. At the time of this writing, the 2-year Treasury yield stands near 4.29% and the 10-year near 4.73%, its highest since January 2025, widening the 2-year to 10-year spread to approximately 44 basis points from 34 basis points a week earlier. West Texas Intermediate crude oil ended the week near $84 per barrel, up more than 20% for the month, with Brent at $89. Gold ended near $4,105 per ounce.

The Chandler team continues to expect the Federal Reserve to hold the federal funds rate at 3.50% to 3.75% through the remainder of 2026, provided actual and market-based measures of inflation remain contained. This week’s resilient consumer spending, firm wage growth, and hot GDP price index raise the probability of an increase in the federal funds rate, though the softer headline GDP gives the Fed room to stay patient. We expect further steepening as inflation expectations and continued federal borrowing pressure the term premium embedded in the US Treasury market and lift long term yields while short term rates track Fed policy. Portfolios remain positioned with an emphasis on high credit quality, ample liquidity, and disciplined duration management, while the timing and direction of the Fed’s next move remains uncertain.

Written by Jayson Schmitt, CFA. Co-Chief Investment Officer