The Fed Can Afford to Remain Patient, but Fiscal Intervention Is Unlikely to Keep US Long-Term Rates Low

Overview

This weekly report focuses on Fed policy communication, the July FOMC minutes, US Treasury buybacks, US-Canada tariff negotiations, and forthcoming economic data. Its central thesis is that inflation and the labor market have not yet produced signals compelling the Fed to act immediately, allowing policy to remain patient; however, direct Treasury intervention in the bond market is unlikely to offset the structural upward forces facing long-term interest rates.

Core views

The report first judges that Chair Warsh's Jackson Hole speech is more likely to discuss the Fed's overall policy and reform framework than to provide forward guidance on near-term rate actions. It believes he may present the progress of five working groups and explain the role of the balance sheet in controlling inflation, the appropriate combination of interest-rate and balance-sheet policies, the disinflationary effects of AI-driven productivity gains, and the future communication framework. Recent inflation and labor-market data have been relatively moderate, reducing the urgency for the Fed to change policy, so there is also no need to use the speech to prepare the ground for a near-term rate hike. Given the confusion caused by messaging at the July press conference, Jackson Hole will also give Warsh an opportunity to explain his reluctance to provide forward guidance and clarify how the Fed will communicate in the future. The July FOMC minutes further support a patient, wait-and-see approach. Most participants favored leaving the policy rate unchanged, while only “several” supported a July rate hike; Nomura estimates there were about five hawkish dissenters. Most participants still expected inflation to gradually slow over the remainder of the year, but the Committee did not reach a consensus on several of Warsh's core views. Regarding AI productivity, only “some” participants believed it would ultimately reduce production costs, and views differed on how quickly the effects would materialize, indicating that “productivity-driven disinflation” has not yet become the Committee's shared assessment. Regarding financial conditions, Warsh had suggested that rising market yields could substitute for Fed rate hikes, but the minutes showed that about 7—9 participants believed intermeeting financial conditions had tightened, partly because markets expected the Committee to adopt a more restrictive stance. This suggests limited support for viewing tighter financial conditions as a substitute for policy rate hikes. San Francisco Fed President Daly continued to support pausing rate hikes in July and believed there was not yet clear evidence of broad spillovers from AI investment to consumer prices. The US Treasury announced an expansion of buybacks of long-dated securities to reduce borrowing costs, and the term premium declined following the announcement. Treasury Secretary Bessent said yields did not reflect fundamentals and that the Treasury still had a “large toolkit” to take further action if needed. However, the report questions whether the buyback announcement or sustained intervention can deliver a lasting decline in long-term borrowing costs: after Treasuries rallied on Wednesday, they had already given back part of their gains on Thursday; the AI investment boom, large fiscal deficits, and the global bond selloff continue to exert structural upward pressure on rates, while a more interventionist and less “regular and predictable” approach to debt management could itself be an offsetting factor. Expanded buybacks are expected to require increased issuance of short-term Treasury bills. Nomura does not expect this to significantly raise short-term funding rates, but if market stress emerges, it does not rule out the Fed resuming reserve management purchases to stabilize funding markets. On trade, President Trump postponed the Canadian Section 338 tariffs originally scheduled to take effect on August 19 until August 22. Media reports indicate that the two countries have reached a preliminary agreement, with details still being finalized: tariffs on Canadian steel and aluminum could be reduced from 50% to 25%, while tariffs on the non-US content of Canadian auto exports could fall from 25% to 15%. Because a substantial share of trade already complies with USMCA rules, the agreement is expected to produce only a limited reduction in the US average effective tariff rate; Nomura maintains its long-term effective tariff rate forecast of approximately 8%—9%. Improving trade conditions could also alleviate Fed concerns about another inflationary wave. The July FOMC minutes showed that several participants already believed the pass-through of tariffs to prices was largely complete. Inflation data continue to support delaying rate hikes. Based on the July CPI, PPI, and import prices, Nomura expects July core PCE to rise 0.226% m-o-m, up from 0.132% in June; the y-o-y rate is expected to edge down from 3.29% to 3.27%. Core goods inflation is expected to pick up slightly, while financial-services prices may drive a rebound in “supercore” PCE, although the report believes policymakers may partly look through acceleration caused by financial services. Recent comments by Fed officials indicate that a monthly core PCE increase of around 0.2% could be viewed as progress toward the 2% target. As tariff effects fade and residual seasonality weakens, Nomura expects core PCE to gradually decline to 3.2% by end-2026 under the current statistical methodology; planned BEA methodological changes could reduce it by another roughly 20bp, bringing it close to 3.0%. However, the AI investment boom could still generate substantial price pressure, leaving inflation risks tilted to the upside. Economic activity is cooling, but the report does not view this as a severe deterioration. Nomura expects personal income to rise 0.2% m-o-m in July, while personal spending is forecast to shift from 0.3% growth in June to a 0.1% decline, with real spending down 0.2%. Goods spending is being weighed down by weak retail sales, while services spending may also slow as healthcare services growth retreats from its previously elevated pace. The Conference Board Consumer Confidence Index is expected to fall from 90.8 to 90.0 in August, while the final University of Michigan Consumer Sentiment Index is forecast to decline from 51.0 to 50.2. High mortgage rates continue to restrain the housing market, with the annualized pace of new home sales expected to decrease from 628k to 612k in July. Manufacturing, meanwhile, presents a mixed picture. Durable goods orders are expected to fall 0.6% m-o-m in July after rising 0.5% in June, mainly because Boeing's net orders declined from 113 aircraft to 30 and orders for motor vehicles and parts decreased. However, durable goods orders excluding transportation equipment are forecast to accelerate from 0.7% growth to 0.9%, as new orders indexes in several manufacturing surveys strengthened and related industrial production rose markedly. Shipments of core capital goods, an input into GDP equipment investment, are expected to increase 0.6%, indicating that manufacturing and capital expenditure remain resilient. The goods trade deficit is forecast to narrow from $101.5bn to $96.0bn in July as import growth slows and exports strengthen. Employment data also support a wait-and-see approach. The preliminary annual benchmark revision to nonfarm payrolls due next week is expected to be neutral to slightly positive, potentially breaking the trend of substantial downward revisions in recent years. QCEW data show that, as of December 2025, its employment level was slightly above the not-seasonally-adjusted nonfarm payroll level. Some officials had previously made an implicit negative “mental adjustment” to monthly nonfarm payroll data, assuming they would later be revised downward; the report believes the existing benchmark data suggest officials may have been overly pessimistic about the 2025 employment trend. Initial jobless claims declined and continuing claims rose slightly, but both remain low overall, consistent with a stabilizing labor market. Regarding growth tracking, Nomura lowered its Q3 real GDP forecast from a 2.8% annualized q-o-q rate to 2.7%, and reduced its forecast for real final sales to private domestic purchasers from 1.8% to 1.7%. Weak housing data lowered the residential investment estimate, while weaker-than-expected import prices weighed on the real net export assumption; stronger residential utility spending and a lower July core PCE tracking estimate prompted an upward revision to the real personal consumption forecast, providing a partial offset. The second estimate of Q2 GDP is expected to remain at a 1.5% annualized q-o-q rate: consumption may be revised down, while fixed investment, government spending, and net exports may be revised up; real final sales to private domestic purchasers excluding trade, government, and private inventory investment may still be revised down. For the medium-term outlook, the report believes US growth remains resilient, with business investment spreading from AI into a broader range of areas and capital expenditure remaining the principal driver. Following strong consumption in Q2, Q3 may see negative payback, but this is more likely to represent a moderate loss of momentum than a severe recession; housing activity remains constrained by high mortgage rates, the labor market is stabilizing overall, and the unemployment rate is expected to gradually decline to 3.9% by end-2027. On policy, Nomura expects the Fed to keep rates unchanged indefinitely, but risks are tilted toward tightening: although inflation remains above the 2% target, weakening momentum and Warsh's dovish stance support a pause; if the Fed responds inadequately to early inflationary pressures, it could fall behind the curve, while market concerns about its inflation-fighting credibility could also force it to rebuild credibility through rate hikes. The report also expects that a new Republican budget reconciliation bill before the midterm elections will not deliver large-scale fiscal stimulus.

Analysis framework

The report first assesses the policy function of the Jackson Hole speech based on the Chair's recent remarks, media reports, and the topics addressed by the five working groups, then uses participant counts and differences of opinion in the July FOMC minutes to evaluate the Committee's consensus. It subsequently analyzes the market and inflation transmission of the Treasury buybacks and US-Canada tariff developments, and uses CPI, PPI, import prices, QCEW, retail sales, manufacturing surveys, and trade data to formulate forecasts for core PCE, the employment benchmark revision, and GDP tracking. Finally, it incorporates its short-term data assessments into the 2026—2027 outlook for growth, inflation, and Fed policy.

Methodology notes

• Fixed Income and Credit AnalysisYield curve analysis

  Analysis of the term premium and short- and long-term funding conditions

  The report observes changes in the term premium and long-term Treasury yields following the Treasury's buyback announcement, while also assessing the effect of increased short-term Treasury bill issuance on short-term funding rates to distinguish short-term market reactions from long-term structural interest-rate pressures.

• (Out-of-vocabulary methodology)

  Core PCE bridge forecast

  The report derives core PCE from released CPI, PPI, and import-price components, distinguishes the monthly inflation contributions from core goods, financial services, and supercore services, and then incorporates statistical methodological adjustments to estimate the year-end inflation path.

• (Out-of-vocabulary methodology)

  Real-time GDP tracking estimate

  Based on the latest data on housing, import prices, consumption, and utility spending, the report adjusts assumptions for residential investment, net exports, and personal consumption item by item, thereby updating its Q3 GDP and private domestic final demand forecasts.

• (Out-of-vocabulary methodology)

  Comparison of QCEW and nonfarm payroll benchmark revisions

  The report compares QCEW employment data with not-seasonally-adjusted nonfarm payroll levels to assess the direction of the forthcoming annual benchmark revision and test policymakers' previous assumption that employment data would be revised downward.

Asset mapping & comparison

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

• US Treasuries, especially long-dated Treasuries

  The term premium declined after the Treasury expanded buybacks, but the report believes the measure is unlikely to sustainably reduce long-term borrowing costs.

  Strengths

  The Treasury can still use buybacks and other tools to improve market demand and short-term funding conditions; if funding markets come under pressure, the Fed may also resume reserve management purchases.

  Weaknesses

  Part of the post-announcement Treasury rally was quickly reversed, indicating market doubts about the lasting effectiveness of administrative intervention.

  Comparison

  Long-dated Treasuries face structural pressure from AI investment, fiscal deficits, and the global bond selloff, while increased short-term Treasury bill issuance is not expected to significantly raise short-term funding rates.

  Risks

  A more interventionist and less predictable approach to fiscal management, combined with fiscal deficits and the global bond selloff, could continue to raise the term premium and long-term yields.

Key data

• July core PCE m-o-m forecast0.226%Above June's 0.132%, but a monthly increase of around 0.2% is viewed as progress toward the 2% target
• July core PCE y-o-y forecast3.27%A slight decline from the previous 3.29%
• End-2026 core PCE forecast3.2%Calculated under the current statistical methodology; planned methodological adjustments could lower it to about 3.0%
• Long-term effective tariff rate forecast8-9%The preliminary US-Canada agreement is expected to reduce the average effective tariff rate only slightly
• Potential adjustment to Canadian steel and aluminum tariffsReduction from 50% to 25%A provision of the preliminary US-Canada agreement reported by the media
• Potential adjustment to tariffs on the non-US content of Canadian automobilesReduction from 25% to 15%A provision of the preliminary US-Canada agreement reported by the media
• Q3 GDP tracking forecast2.7% q-o-q arPreviously 2.8%
• Q3 real final sales to private domestic purchasers1.7% q-o-q arPreviously 1.8%
• Second estimate of Q2 GDP1.5% q-o-q arExpected to be broadly unchanged from the initial estimate
• July personal spending forecast-0.1% m-o-m0.3% in June; real personal spending is expected to decline 0.2%
• July personal income forecast0.2% m-o-mGrowth is expected to remain broadly unchanged
• July new home sales forecast612k628k in June, with high mortgage rates posing a headwind
• August Conference Board Consumer Confidence Index forecast90.090.8 in July
• Final August University of Michigan Consumer Sentiment Index forecast50.2The preliminary reading was 51.0
• July durable goods orders forecast-0.6% m-o-mUp 0.5% in June; transportation equipment orders are expected to weigh on the total
• Durable goods orders excluding transportation equipment forecast0.9% m-o-m0.7% in June, indicating that underlying manufacturing demand remains strong
• Core capital goods shipments forecast0.6% m-o-mAn input into GDP equipment investment
• July goods trade deficit forecast$96.0bn$101.5bn in June
• End-2027 unemployment rate forecast3.9%The report expects the unemployment rate to gradually decline after the labor market stabilizes

Impact & implications

The report believes that moderate core PCE, slowing consumption, and broadly stable employment data allow the Fed to continue waiting without using Jackson Hole to prepare the ground for a near-term rate hike. Easing US-Canada trade tensions further reduces concerns that tariffs will reignite inflation, while a neutral or positive nonfarm payroll benchmark revision could indicate that policymakers previously underestimated employment resilience. Meanwhile, Treasury buybacks can influence the term premium only temporarily and cannot eliminate the upward pressure on long-term rates from AI capital expenditure, fiscal deficits, and the global bond selloff. A near-term policy pause can therefore coexist with medium- to long-term interest-rate risks.

Risks

• A lack of forward guidance, ambiguous comments from Warsh, and renewed political pressure on FOMC members could weaken the Fed's inflation-fighting credibility and trigger sharp market reactions.
• If the Fed responds too slowly to initial inflationary pressures, it could fall behind the curve and ultimately have to rebuild policy credibility through rate hikes.
• Further escalation in geopolitical tensions could tighten financial conditions and worsen the fiscal outlook.
• If the AI investment boom collapses, it could cause a significant correction in asset prices and weaken business investment.
• AI-driven shortages of memory chips and supply-chain disruptions caused by a prolonged war with Iran could trigger a second wave of goods inflation.

What to watch

• Watch whether Warsh focuses at Jackson Hole on explaining the Fed's reform framework, progress by the five working groups, and future communication methods rather than sending near-term policy signals.
• Watch whether July core PCE is close to the 0.226% m-o-m forecast and whether a monthly reading of around 0.2% strengthens the case for continuing to pause rate hikes.
• Watch whether the preliminary annual benchmark revision to nonfarm payrolls is neutral or slightly positive, thereby confirming whether the 2025 employment trend was stronger than officials previously believed.
• Watch subsequent Treasury buybacks, short-term Treasury bill issuance, and whether funding-market pressures emerge that require intervention through Fed reserve management purchases.
• Watch the final details of the preliminary US-Canada tariff agreement and their impact on the long-term 8%—9% effective tariff rate forecast.
• Watch the week's data on consumer confidence, new home sales, durable goods orders, the second estimate of Q2 GDP, goods trade, and jobless claims.