Fed Watch – 7/31/2026

The below transcript is a literal translation of the podcast audio that has been machine generated by Adobe Podcast.

Kevin Warsh says it’s time for Wall Street to play the ball, not the referee. We’ll unpack what that means and more on this July 31st edition of Fed Watch. So very exciting week here as we wrap up the month of July with the second Fed meeting now from Kevin Warsh. And I think we learned a lot here this week, while at the same time learning very little, which is par for the course for the Fed.

But following up on our recording last month from Lauren following that first meeting, it seems that the Fed is doubling down on eliminating forward guidance and letting the bond market organically signal what is coming, which is a little bit more in line, I think, with ITR’s preferences. Now, we did see rates were held with this meeting. For those that have not seen that headline at this point, we did not see any interest rate change. Which was expected, that’s what we set up for last week. And now intention is going to start to turn towards the fall, and as we think about what’s coming next. As we dig into Walsh’s comments, Warsh did again take the stance that long term yields rising, the markets already did the job of tightening for them, so there was less impetus for the Fed to manually hike rates in the face of some more recent and renewed energy and food borne inflation pressure.

Now, on inflation, Warsh did acknowledge that the progress, but that the job is not finished, so indicated some level of lingering uncertainty there, and said that there’s no tolerance for persistently elevated inflation and indicated that the committee is going to be watching whether a recent pricing pressures, whether it’s energy or tariff related effects, prove temporary or become more entrenched, which in my mind is code for we’re not particularly keen on the idea of hiking at this point, particularly into a supply shock on the energy front, which is what I assumed was going to be the case last week. And again, I think what was refreshing a little bit, again, going back to the the line that’s getting a lot of play there, is that he liked to see folks play the ball, meaning the actual market data and not the referee, meaning instead of parsing every single word, every single syllable about these Fed meeting statements and minutes and forward guidance, and how many times was this adjective used relative to last month? And we’re doing a rolling average of how many times we’re using the word, you know, cooling or things like that. And, and really just repeatedly declined to speculate about what they’re going to do in September or later meetings this fall, explaining that, you know, the Fed should not pre-commit to future actions because doing so can, you know, can really distort, distort or box in policy making and ultimately market behavior. So I did find that personally a little bit refreshing.

So I think a game I want to play today is, you know, what would Milton Friedman have thought about this meeting? And for those unaware, Milton Friedman, one of my personal favorites, you know, a stalwart free market Austrian economist. And I think you probably would have had mixed, you know, probably ultimately skeptical reaction to this meeting. But I think he would have liked this new idea of rejecting the idea of forward guidance. You know, Friedman was always deeply skeptical of policymakers claiming that they could precisely fine tune the economy, which is why he’s one of my favorites, and believe that monetary policy works, you know, really just with long and quite variable lags realistically. And it makes it really dangerous for the Fed to promise future actions or, you know, subtly drip out a future promised outcome that then the market prices in which means now all of a sudden, if we feel like we have to pivot, we’re concerned about a market behavior that we’ve already basically, you know, led the horse to water and to drink. So I think Warsh’s refusal to pre-commit for September or later would be good. And I think Friedman would be behind that. But I also think he would have demanded actions and not rhetoric, which probably means you would have hated the entirety of the monitored Federal Reserve existence. But one of his favorite lines was always that actions speak louder than words. And, and I, I think he would believe, and I think I believe that credibility comes from consistent policy, not repeated assurances around the 2% inflation target. And that’s what, you know, Kevin Walsh’s comments really continue to say that we are clearly focused on that 2% inflation target, and I think Friedman would have asked, well, if inflation is and has been persistently above that target and you’re serious about the 2% target, why isn’t policy clearly moving towards that objective. So I think rhetoric versus action might have left a little bit to be desired. And I think what’s really interesting about some of Kevin Walsh’s wording choices this week is, I think he understands the risk to the Fed’s credibility. And I think that that’s something that Friedman would have appreciated as well. And one of the things that Friedman would always talk about was the, really that inflation expectations become embedded, if people stop believing in the central bank or again, this, you know, mechanism and process and argue that quite a bit throughout the 1970s that once credibility is lost, restoring it becomes much more costly, much more difficult. And I think it’s really interesting, given that Warsh did talk a lot about inflation expectations in this meeting. That was one of his key, sections and talking points, is that one of the more interesting aspects of that press conference is that he entreated, you know, he had always treated inflation expectations as much as a key variable as much as the inflation rate itself, which I think is I think I’m still trying to decide, but I think that’s a positive at least acknowledging that, you know, if we screw this up and that those higher inflation expectations do become embedded, that that’s a risk. And Warsh kept saying long term inflation expectations remain the Fed’s north star, and seem really committed to that. So we’ll see, you know, actions versus rhetoric. We’ll see how this goes in the fall, but I think acknowledging not just inflation today, but inflation expectations for tomorrow, next month, next year and years out is also of course important as well. And so there are a couple other things, uncertainty that, you know, really Warsh, I think uncertainty was maybe a deferral for inaction in this particular meeting. And, you know, I think that Friedman would always acknowledge uncertainty, but argued it was, you know, probably typically because these policymakers, you know, just can’t do everything. And they should just really rely on simple, predictable rules rather than discretionary judgment. And I think the lack of observable policy framework and kind of that boring, predictable, rule bound framework is going to still leave folks guessing just a little bit. But overall, I thought it was an interesting meeting and I think he would have, and I do as well. I think I, I enjoy the improvement in communication style and getting away from, you know, where we’re going to very subtly, you know, signal what we think we might do and let the market figure that out. And I think getting away from that is actually pretty good.

So a couple of other data points to close with that did come out, that got blown out in the noise of the Fed meeting. We did get a prelim GDP number there, so we did see that US GDP, US gross domestic product on an inflation adjusted basis. It did decelerate in 2Q relative to 1Q. We saw the 3/12 rate of change declined from 2.7% to 2.1%, which looks like that that first quarter or 3/12 rate of change peak is going to hold. That is consistent with ITR’s forecast. So we did expect to see some GDP deceleration in the second quarter. And we certainly got that in the prelim number. But overall nothing too too sinister in there, internal components looked all right. Consumption investment components looked all right. A little bit of drag from government spending, which I’m fine with a little bit of drag from. Some some imports coming in. So nothing too, too sinister over there. But we did see disposable income remains under pressure. That June data point coming in, we saw 2Q disposable personal income averaged actually 0.1% below the 2Q ’25 number. So some ongoing consumer strain there that I’m sure the Fed is considering as well. So I think I gave you enough there this week a little bit longer this week than last week. But I think that’s going to do it. And with the Fed meeting in the rear view mirror I think you know we’ll we’ll take Kevin Walsh’s guidance as we get into next week, we’ll get back to playing ball and, and not the referee and we’ll look at some hard data, and some early months data releases and leading indicator releases for next week. So that’s it for Fed Watch. See you next week.