The FOMC May Stay on Hold, but Rate-Hike Tensions Are Rising

Overview

This report is Nomura's weekly macro research on the U.S. economic and policy outlook. The core judgment is that the July FOMC will most likely keep the policy rate unchanged, but market pricing for a rate hike has risen, and there may be two hawkish dissents. The report argues that recent CPI, PPI, core PCE, and wage indicators support a "wait-and-see" approach by the Fed rather than an immediate proactive hike.

Core views

Nomura believes the Fed will keep rates unchanged in the near term, and Chair Warsh may emphasize anti-inflation credibility without giving a clear threshold for rate hikes. At the same time, the report argues that inflation remains above the 2% target, the labor market is stable, and financial conditions are relatively loose, so future risks are tilted more toward hikes than cuts. On tariffs, the new announcement raises the effective tariff rate but broadens exemptions, making the policy implication closer to continuation than significant escalation. On growth, Q2 real GDP is expected to accelerate and private demand to improve, but volatile components such as government spending, net exports, and inventories drag on overall growth.

Analysis framework

The report develops its analysis along five main lines: monetary policy, inflation, wages, tariffs, and growth. It first assesses the July FOMC decision and potential dissenting votes, then uses CPI, PPI, PCE, and ECI forecasts to verify whether inflation pressures are easing; it then evaluates the impact of tariff policy on effective tax rates and inflation, and forms a short-term economic view through previews of GDP, durable goods orders, trade, income and spending, and consumer confidence data.

Methodology notes

• Macro Policy AnalysisFOMC Scenario Assessment

  Rate Path and Dissenting Votes

  Uses market pricing, inflation data, officials' remarks, and financial conditions to assess the probability that the July meeting keeps rates unchanged, and evaluates the signaling significance of hawkish dissents for the policy path.

• Inflation AnalysisCore PCE Decomposition

  CPI/PPI to PCE Mapping

  Infers the June core PCE trend from published CPI and PPI components, and combines wage-sensitive services, core goods, residual seasonality, and BEA methodological adjustments to assess inflation momentum.

• Growth AnalysisGDP Expenditure-Based Forecast

  Private Domestic Final Sales and Volatile Component Breakdown

  Separately evaluates consumption, equipment investment, residential investment, government spending, net exports, and inventories to explain the combination of faster Q2 real GDP growth and drags from some volatile components.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• U.S. Rates

  Directly related

  Strengths

  Short-term inflation and wage data support the FOMC keeping rates unchanged, helping restrain near-term hike expectations.

  Weaknesses

  Core inflation remains above the 2% target, and hawkish dissents plus loose financial conditions leave upside risk to the forward policy path.

  Comparison

  Compared with market pricing of about a one-third probability of a July hike, the report is more skeptical of a proactive hike.

  Risks

  If inflation rebounds or the Fed's credibility is questioned, rates could move higher again.

• U.S. Dollar

  Indirectly related

  Strengths

  If the market reprices toward a more hawkish Fed path, the dollar may gain support.

  Weaknesses

  If PCE and wage data confirm disinflation, the dollar's rate advantage may weaken at the margin.

  Comparison

  The report does not provide explicit FX trading recommendations, only a dollar logic driven by the policy path.

  Risks

  Geopolitics, tariffs, and changes in Fed communication could amplify dollar volatility.

• U.S. Equities

  Indirectly related

  Strengths

  Improving Q2 growth, a rebound in consumption, and strong equipment investment support earnings expectations.

  Weaknesses

  Hike risk, AI valuation corrections, and tighter financial conditions may weigh on risk assets.

  Comparison

  The report emphasizes macro risk transmission more than sector or single-stock allocation.

  Risks

  An AI bubble burst, energy price shocks, renewed inflation acceleration, and policy uncertainty.

• U.S. Credit Assets

  Indirectly related

  Strengths

  A stable labor market and resilient growth help credit fundamentals.

  Weaknesses

  If the hike path turns more hawkish, financing costs and credit spreads may come under pressure.

  Comparison

  Like equities, credit assets are affected by both growth support and rising-rate risk.

  Risks

  A sudden tightening in financial conditions, worsening fiscal outlook, or geopolitical shocks.

• Commodities and Energy

  Source of macro shocks

  Strengths

  The U.S. economy is relatively resilient to oil price shocks because energy consumption accounts for a smaller share of household spending and domestic energy production is strong.

  Weaknesses

  Middle East conflict and rising energy prices may hurt consumer confidence and push up inflation expectations.

  Comparison

  The report does not provide commodity price targets, focusing mainly on the impact of energy prices on inflation and consumption.

  Risks

  A prolonged war with Iran, supply chain disruptions, or a second-round energy price shock.

Key data

• July Policy Rate Forecast3.625%The FOMC is expected to keep the policy rate unchanged, with no substantive change in the statement.
• July FOMC Dissenting Votes2 hawkish dissentsHammack and Logan are expected to support a rate hike; Kashkari represents the risk of a third dissenting vote but is not the base case.
• June Core PCE Forecast0.175% m-o-m，3.3% y-o-yThe report believes this monthly pace is close to an annualized 2%, helping reduce the probability of a near-term rate hike.
• Year-End Core PCE Forecast3.2% y-o-y，methodology-adjusted about 3.0%Weaker tariff pass-through, easing wage pressure, and residual seasonality may drive gradual disinflation.
• Q2 ECI Forecast0.7% q-o-qBelow Q1's 0.9%, pointing to gradually easing wage pressure.
• Average Effective Tariff Rate Forecastabout 8%, long-term endpoint 8-9%Replacing Section 122 with Section 301 is expected to raise it by about 1 percentage point, but broader exemptions limit the scale of escalation.
• Q2 Real GDP Forecast2.5% q-o-q arAbove Q1's 2.1%, supported by a rebound in consumption and equipment investment.
• Q2 Private Domestic Final Sales Forecast3.4% q-o-q arAbove Q1's 2.2%, showing improving domestic demand.
• July Consumer Confidence Forecast90.5Below June's 91.2, dragged down by the Middle East situation, energy prices, and equity market volatility.

Impact & implications

For asset allocation, the report conveys a combination of "no near-term hike, but hawkish policy risk." If core PCE and ECI continue to ease, the rates market may pull back pricing for a near-term hike; but if inflation persistence, tariff pass-through, or AI-related price pressures re-emerge, the Fed may be forced to hike sooner to preserve credibility. The lack of significant tariff escalation helps ease tail inflation risks, but USMCA negotiations and new Section 301 investigations still need to be monitored.

Risks

• Inflation comes in above expectations and forces the Fed to hike faster.
• Rising political pressure undermines Fed credibility, triggering sharp market reactions.
• Escalating geopolitical risks lead to tighter financial conditions and a worsening fiscal outlook.
• AI-related demand and supply shortages push up commodity prices, creating new inflation pressures.
• USMCA negotiations or new Section 301 investigations lead to another escalation in tariff policy.
• A collapse in the AI valuation bubble could depress asset prices and weaken corporate investment.

What to watch

• The July FOMC rate decision, statement wording, and Warsh's press conference remarks.
• Whether Hammack, Logan, and Kashkari cast dissenting votes in favor of a rate hike.
• June core PCE, personal income and spending, ECI, and the initial Q2 GDP release.
• The tariff exemption list, USMCA negotiations, and progress in new Section 301 investigations.
• Consumer confidence, initial jobless claims, and labor market dispersion indicators.
• AI-related capital spending, memory chip shortages, and supply chain disruptions.