Nomura Expects the Fed to Remain Patient, While Fiscal Intervention Is Unlikely to Keep Long-Term Rates Down

Overview

This edition of the US Economic Weekly focuses on the Jackson Hole meeting, the minutes of the Federal Reserve's July meeting, Treasury securities buybacks, developments in US-Canada trade, and upcoming economic data. Nomura's central view is that recent inflation and labor market data have not forced the Fed to adjust policy quickly, and that Warsh is more likely to discuss the institutional framework than provide interest-rate forward guidance. Meanwhile, fiscal intervention can affect Treasury prices only temporarily and is unlikely to offset the structural upward forces facing long-term rates.

Core views

The report first concludes that Warsh's speech at Jackson Hole is more likely to be a “macro-themed speech” discussing the Federal Reserve's overall framework than an effort to pave the way for a near-term rate hike or cut. This view is based on his continued avoidance of forward guidance and his plan to explain the “intellectual framework” behind a broader reform agenda. Relatively moderate inflation and labor market data have reduced the urgency of an immediate policy adjustment. He may report on the progress of five working groups and discuss the balance sheet's role in controlling inflation, the appropriate combination of interest-rate and balance-sheet policies, the disinflationary effects of AI-driven productivity gains, and the future communications framework. Given the confusion caused by the messaging at the July press conference, Jackson Hole also provides him with an opportunity to explain why he is unwilling to offer forward guidance and to clarify how the Fed will communicate in the future. The minutes of the July FOMC meeting support maintaining a patient stance. Unless inflation data deliver a hawkish surprise, most participants remain willing to keep the policy rate at its current level. Only “several” participants supported a rate hike in July, which Nomura estimates amounted to about five people, including nonvoting members. “Most” participants expected inflation to slow over the remainder of the year. However, the Committee did not reach a consensus on several of Warsh's core views. Only “some” participants agreed that AI-driven productivity gains would ultimately reduce production costs, and they disagreed over when the effects would emerge, indicating that “productivity-driven disinflation” has not yet become the Committee's shared view. Warsh also believes higher market yields can substitute for Fed rate hikes, but the minutes indicated that around seven to nine participants viewed financial conditions as having tightened partly because markets expected the Committee to adopt a more restrictive policy. Support is therefore limited for treating tighter financial conditions as a substitute for additional policy tightening. San Francisco Fed President Daly continued to support leaving rates unchanged in July and said there was still no evidence that AI investment had generated broad price spillovers, with its impact on consumer prices currently concentrated in only a few categories. The Treasury announced an expansion of buybacks of longer-dated securities to ease borrowing costs, and the term premium declined after the announcement. Treasury Secretary Bessent said yields did not reflect fundamentals and that the Treasury could deploy a larger policy toolkit if necessary. However, Nomura doubts that either the buyback announcement or sustained intervention can deliver a durable decline in long-term borrowing costs: by Thursday, Treasuries had given back part of the gains made after Wednesday's announcement. The AI investment boom, massive fiscal deficits, and the global bond selloff continue to push rates higher, while a more interventionist approach to debt management may also weaken the “regular and predictable” policy framework. Expanded buybacks may be financed through increased issuance of short-term Treasury bills. The report expects this will not significantly raise short-term funding rates, but if funding markets come under pressure, the Federal Reserve may resume reserve management purchases to stabilize the market. On trade, President Trump postponed the Canadian Section 338 tariffs originally scheduled to take effect on August 19 until August 22. Media reports indicated that the two countries had reached a preliminary agreement, with specific terms still being finalized: tariffs on Canadian steel and aluminum may be reduced from 50% to 25%, while the tariff rate on the non-US content of Canadian auto exports may be lowered from the current 25% to 15%. Because a substantial share of trade already complies with USMCA rules, these changes would reduce the average effective tariff rate only slightly. Nomura still expects the long-run effective tariff rate to stabilize at around 8% to 9%. More positive trade developments may also ease the Fed's concerns about a new wave of inflation. The minutes of the July meeting showed that several participants believed the pass-through of tariffs to prices was now largely complete. Price and demand data also support the Fed remaining patient. Based on the July CPI, PPI, and import prices, Nomura expects core PCE to rise 0.226% m-o-m, up from 0.132% in June, while the y-o-y rate is expected to edge down from 3.29% to 3.27%. Core goods inflation may rebound moderately, and financial services prices may accelerate “supercore” PCE, but the report believes policymakers may appropriately look through part of this impact. Recent Fed officials have viewed a monthly core PCE increase of around 0.2% as progress toward the 2% target. As tariff effects and residual seasonality fade, the report expects core PCE to decline gradually, reaching 3.2% y-o-y at the end of 2026 under the current methodology. Planned methodological adjustments may lower it further to around 3.0%. Nevertheless, the AI investment boom may still generate substantial price pressures, leaving inflation risks tilted to the upside. Economic activity is cooling, but the report does not expect the US economy to deteriorate severely. Personal spending is expected to decline 0.1% m-o-m in July after rising 0.3% in June. Spending on both goods and services may slow, while inflation-adjusted real spending is expected to fall 0.2%. Personal income is expected to increase 0.2% m-o-m, broadly unchanged. The housing market remains constrained by high mortgage rates, with July new home sales expected to decline from 628,000 units in June to 612,000 units. Meanwhile, business investment remains strong and is gradually broadening beyond AI into wider areas. The report expects capital expenditure-driven growth to continue. Q2 consumption was supported by tax refunds, income growth, and temporary factors, and some of this strength may unwind in Q3. However, the result is more likely to be a moderate loss of momentum than a severe deterioration. Manufacturing data show a divergence between the headline and underlying components. Durable goods orders are expected to decline 0.6% m-o-m in July after rising 0.5% in June, mainly because Boeing's net orders plunged from 113 aircraft in June to 30, alongside a decline in orders for motor vehicles and parts. Excluding volatile transportation equipment, however, durable goods orders are expected to rise 0.9% m-o-m, up from 0.7% in June. New orders indexes in several manufacturing surveys strengthened, and industrial production of durable goods excluding transportation equipment also increased notably. Shipments of core capital goods, which feed into GDP equipment investment, are expected to rise 0.6% m-o-m, indicating that underlying manufacturing demand remains resilient. Labor market evidence is also more positive than previously feared. The upcoming preliminary annual benchmark revision to nonfarm payrolls may be neutral or even slightly positive, breaking the pattern of substantial downward revisions in recent years. QCEW data for Q4 2025 were relatively solid, and as of December 2025, the employment level was slightly above the unadjusted nonfarm payroll figure. Last year, some officials made an implicit negative “mental adjustment” to newly released payroll data, but current benchmark data suggest they may have been overly pessimistic about the 2025 employment trend. Initial jobless claims declined, while continuing claims edged higher. Both remained low on an unadjusted basis, broadly consistent with a stabilizing labor market. Nomura expects the unemployment rate to gradually decline to 3.9% by the end of 2027. On growth tracking, Nomura lowered its forecast for annualized Q3 real GDP growth from 2.8% q-o-q to 2.7% and revised real final sales to private domestic purchasers down from 1.8% to 1.7%. Weak housing data reduced the residential investment estimate, while import prices that were significantly weaker than expected lowered the assumption for real net exports. Stronger residential utility spending and a lower July core PCE tracking estimate prompted an upward revision to the real personal consumption forecast, offsetting part of the drag. The second estimate of Q2 GDP is expected to remain at 1.5% q-o-q annualized. Downward revisions to retail data may reduce consumption, but upward revisions to fixed investment, government spending, and net exports are expected to provide an offset. Real final sales to private domestic purchasers, which exclude volatile trade, government spending, and private inventory investment, may be revised down. Overall, Nomura expects weakening inflation momentum, Warsh's dovish inclination, and the wait-and-see stance of most officials to keep the Federal Reserve on hold indefinitely, but risks are tilted toward further tightening. If the Fed fails to respond adequately to emerging inflation pressures, it may risk falling “behind the curve.” Market concerns about its inflation-fighting credibility may also force it to rebuild credibility through rate hikes. The report also expects no additional Republican budget reconciliation bill providing significant fiscal stimulus before the midterm elections.

Analysis framework

The report first uses Warsh's recent remarks and the minutes of the July FOMC meeting to assess policy communications and the Committee's consensus, then evaluates the effectiveness of policy intervention by examining the term premium and Treasury market movements following the Treasury's buyback announcement. It subsequently estimates core PCE using CPI, PPI, and import-price data, compares QCEW and nonfarm payroll data to assess the likely direction of the benchmark revision, and updates GDP tracking estimates based on housing, trade, consumption, and price data. Finally, it integrates this near-term evidence into an outlook for US growth, inflation, and monetary policy.

Methodology notes

• Event Games and Behavioral FinanceEvent-driven analysis

  Policy Event-Driven Analysis

  The report focuses on events including the Jackson Hole speech, FOMC meeting minutes, the Treasury buyback announcement, and tariff adjustments, comparing policy signals and market reactions before and after each event to assess their impact on interest rates and policy expectations.

• Event Games and Behavioral FinanceExpectation Gap/Expectation Management

  Federal Reserve Communications and Expectation Management

  The report analyzes Warsh's reluctance to provide forward guidance, the confused communications at the July press conference, and market expectations for future tightening, explaining how communication methods affect financial conditions and the Fed's inflation-fighting credibility.

• Fixed Income and Credit Analysis

  Term Premium and Structural Interest-Rate Pressure Analysis

  The report examines changes in the term premium following the Treasury's buyback announcement and compares the short-term policy impact with longer-term forces such as AI investment, fiscal deficits, and the global bond selloff to assess whether long-term yields can decline sustainably.

• (Out-of-Vocabulary Method)

  Core PCE Bridge Estimate

  The report uses already released CPI, PPI, and import-price components to estimate the yet-to-be-released core PCE figure and further distinguishes the contributions of core goods and financial services to inflation.

• (Out-of-Vocabulary Method)

  Real-Time GDP Tracking

  The report adjusts assumptions for residential investment, net exports, and personal consumption item by item based on newly released housing, import-price, consumption, and trade information, thereby updating forecasts for Q3 GDP and private domestic final demand.

• (Out-of-Vocabulary Method)

  QCEW and Nonfarm Payroll Benchmark Comparison

  The report compares QCEW employment data with unadjusted nonfarm payroll data to determine whether the upcoming annual benchmark revision to nonfarm payrolls is likely to be negative, unchanged, or positive.

Asset mapping & comparison

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

• US Treasuries

  The term premium declined after the Treasury expanded buybacks of longer-dated securities, but the report believes this effect is unlikely to last.

  Strengths

  The Treasury can expand buybacks further and deploy additional tools if necessary; if funding markets come under pressure, the Federal Reserve may resume reserve management purchases.

  Weaknesses

  The AI investment boom, massive fiscal deficits, and the global bond selloff exert persistent upward pressure on long-term yields.

  Comparison

  Treasuries rallied after Wednesday's announcement but had already given back part of the gains by Thursday.

  Risks

  A more interventionist and less predictable approach to debt management may offset the positive effect of buybacks on borrowing costs.

Key data

• July Core PCE M-o-M Forecast0.226%Above June's 0.132%; the report believes this remains consistent with progress toward the Federal Reserve's 2% target
• July Core PCE Y-o-Y Forecast3.27%Previously 3.29%
• End-2026 Core PCE Forecast3.2%Calculated under the current methodology; planned methodological adjustments may lower it to around 3.0%
• Long-Run Effective Tariff Rate Forecast8%-9%The preliminary US-Canada agreement is expected to reduce the average effective tariff rate only slightly
• Q3 GDP Tracking Estimate2.7% 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
• August Consumer Confidence Index Forecast90.090.8 in July
• July New Home Sales Forecast612k628k in June
• July Personal Spending Forecast-0.1% m-o-m0.3% in June; real personal spending is expected to decline 0.2%
• July Durable Goods Orders Forecast-0.6% m-o-mRose 0.5% in June
• 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-mThis indicator is an 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 labor market to stabilize gradually
• Final August University of Michigan Consumer Sentiment Forecast50.2The preliminary reading was 51.0

Impact & implications

The report believes that recent moderate inflation, stabilizing employment, and moderately cooling demand have reduced the need for the Fed to adjust interest rates immediately. Jackson Hole is more likely to influence the policy communications framework than directly alter the near-term rate path. Expanded Treasury buybacks can temporarily lower the term premium but are unlikely to offset the structural interest-rate pressure generated by fiscal deficits, AI capital expenditure, and the global bond selloff. Easing trade tensions helps alleviate inflation concerns, but core inflation remains above target, meaning policy risks are still tilted toward tightening.

Risks

• The lack of forward guidance, insufficiently clear remarks from Warsh, and renewed political pressure on FOMC members may weaken the Federal Reserve's inflation-fighting credibility and trigger sharp market reactions.
• If the Federal Reserve fails to respond promptly to emerging inflation pressures, it may fall behind the curve and ultimately need to rebuild policy credibility through rate hikes.
• Further geopolitical escalation may tighten financial conditions and worsen the fiscal outlook.
• If the AI investment boom collapses, it may trigger a significant asset-price correction and weaken business investment.
• AI-driven shortages of memory chips and supply-chain disruptions caused by a prolonged war with Iran may trigger a second wave of goods inflation.
• The AI investment boom itself may generate strong price pressures, keeping inflation risks tilted to the upside.

What to watch

• Watch whether Warsh focuses at Jackson Hole on the five working groups, balance-sheet policy, AI productivity, and the Federal Reserve's communications framework rather than providing near-term interest-rate guidance.
• Watch the core PCE release during the week of August 24; a monthly increase of around 0.2% would be viewed as continued progress toward the 2% inflation target.
• Watch whether the preliminary annual benchmark revision to nonfarm payrolls is neutral to slightly positive, as the report expects.
• Watch the final terms of the preliminary Canadian tariff agreement, including whether steel and aluminum tariffs are reduced from 50% to 25% and whether the tariff on the non-US content of autos is lowered from 25% to 15%.
• Watch whether long-term yields and the term premium continue to decline following the expanded Treasury buybacks and whether pressure emerges in short-term funding markets.
• Watch consumer confidence, new home sales, personal income and spending, durable goods orders, the Q2 GDP revision, and goods trade data.
• Watch whether Federal Reserve communications and market reactions further affect its inflation-fighting credibility.