Nomura expects the July FOMC to leave rates unchanged, but hike tensions have not faded

Overview

This is a weekly Nomura report on the U.S. economy and monetary policy, with the central theme of “hike tension” ahead of the July FOMC meeting. The report argues that the rise in market pricing for a July hike mainly reflects insufficient forward guidance and uncertainty around the Fed’s reaction function, rather than a material change in the economic outlook. Nomura’s baseline view remains that the Fed will keep rates unchanged in July and hold the policy rate steady for a longer period.

Core views

The core views are: first, the July FOMC will most likely stay on hold, keeping the policy rate at 3.625%, though two hawkish dissenting voters may support a rate hike. Second, June CPI and PPI came in below expectations and are expected to drive a noticeable slowdown in core PCE, strengthening the case for patient observation. Third, U.S. economic growth remains resilient, with Q2 real GDP expected to accelerate and private demand improving. Fourth, the additional shock from the new tariff announcement is relatively mild, with the average effective tariff rate expected to rise to around 8%, while the long-term terminal range remains 8%-9%. Fifth, although the probability of a near-term hike is not high, inflation remains above target and policy risks are skewed toward tightening.

Analysis framework

The report combines event preview, macro data forecasting, and policy reaction function analysis: it first assesses the FOMC voting structure and the chair’s communication, then uses CPI, PPI, PCE, ECI, GDP, consumption, trade, and confidence indicators to judge economic and inflation momentum, and finally incorporates tariff policy, financial conditions, and market pricing into the policy path assessment.

Methodology notes

• Monetary policy analysisFOMC reaction function and voting structure analysis

  Assess the policy rate path and dissent-vote risk through inflation, employment, financial conditions, and officials’ remarks.

  The report believes most committee members will choose to wait due to moderating inflation, but Hammack and Logan may support a rate hike because inflation remains high, growth is resilient, and financial conditions are loose.

• Inflation forecastingCore PCE component mapping

  Infer PCE inflation using CPI and PPI subcomponents.

  Based on lower-than-expected June CPI and PPI, the report expects core PCE m-o-m to fall to 0.175%, and judges that supercore PCE will slow while core goods will rebound slightly.

• High-frequency economic trackingPrincipal component analysis weekly data tracker

  Extract the first principal component from 13 U.S. daily and weekly indicators and calibrate it to track year-over-year change in real GDP.

  The report uses this framework to observe high-frequency economic momentum in the industrial and consumer sectors.

Asset mapping & comparison

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

• U.S. policy rates

  Directly related

  Strengths

  Marginal easing in inflation and softer wage pressures support leaving rates unchanged in July.

  Weaknesses

  Core inflation remains above the 2% target, and hawkish officials may continue to push the discussion toward rate hikes.

  Comparison

  Compared with market pricing of roughly a one-third probability of a July hike, Nomura is more inclined to believe there will be no immediate hike.

  Risks

  If inflation strengthens again, the Fed may be forced to hike quickly to rebuild credibility.

• U.S. Treasuries

  Highly related

  Strengths

  Expectations of staying on hold help limit further upside in front-end yields.

  Weaknesses

  Upside-skewed hike risk and fiscal/geopolitical risks may raise the term premium.

  Comparison

  The report expects the policy rate to remain at 3.625% through end-2027, with forecasts for 2-year, 5-year, and 10-year Treasury yields still in relatively high ranges.

  Risks

  Political pressure, sticky inflation, or a sudden tightening in financial conditions could trigger volatility in yields and the curve.

• U.S. economic growth

  Macro fundamental mapping

  Strengths

  Q2 GDP, final private sales, consumption, and equipment investment are expected to improve, while the labor market remains resilient.

  Weaknesses

  Volatile components such as government spending, net exports, and inventories weigh on headline GDP.

  Comparison

  Q2 real GDP is expected to rise from 2.1% in Q1 to 2.5%, showing that growth has not materially stalled.

  Risks

  A pullback in AI investment, energy price shocks, supply chain disruptions, and declining consumer confidence could weaken growth.

Key data

• Expected July FOMC policy rate3.625%Expected to remain unchanged, with no substantive changes in the post-meeting statement.
• Dissenting votes for a July hike2 votesCleveland Fed President Hammack and Dallas Fed President Logan are expected to support a rate hike; Kashkari poses the risk of a third dissenting vote.
• Forecast for June core PCE m-o-m0.175% m-o-mClose to an annualized pace of about 2%, supporting Fed patience.
• Forecast for June core PCE y-o-y3.3% y-o-yExpected to decline from the previous 3.4%.
• Forecast for end-2026 core PCE3.2% y-o-yBased on the current methodology; after the planned methodology adjustment, it could be closer to 3.0%.
• Forecast for Q2 Employment Cost Index0.7% q-o-qSlowing from 0.9% in Q1, pointing to easing wage pressures.
• Forecast for Q2 real GDP2.5% q-o-q arHigher than 2.1% in Q1.
• Forecast for Q2 final sales to private domestic purchasers3.4% q-o-q arDriven by a rebound in consumption and strong equipment investment.
• Impact on average effective tariff rateabout a 1 percentage point increase to 8%After Section 301 replaced Section 122, the impact was broadly in line with Nomura’s expectations.
• Expected long-term terminal average effective tariff rate8%-9%The report maintains this forecast range.

Impact & implications

For markets, the report implies that an immediate July hike is not the baseline scenario, and some of the upward pricing in front-end rates may reflect an uncertainty premium; however, as long as core inflation remains meaningfully above 2% and growth stays resilient, room for rate cuts is also limited. U.S. Treasury yields face a combination of “near-term hold, but risks skew hawkish,” while risk assets need to watch the diffusion of AI investment, tariff pass-through, consumer confidence, and changes in financial conditions.

Risks

• Inflation remains above target or reaccelerates, forcing the Fed to hike faster than expected.
• FOMC participants may face stronger political pressure, potentially damaging Fed credibility and triggering sharp market reactions.
• An escalation in geopolitical risks could tighten financial conditions and worsen the fiscal outlook.
• A significant correction in AI-related asset valuations could weigh on corporate investment.
• Memory chip shortages, supply chain disruptions, or a prolonged Iran war could create second-round price pressures.
• USMCA negotiations and a new Section 301 capacity investigation could bring upside risks to tariff policy.

What to watch

• The July FOMC statement, the wording of Chair Warsh’s press conference, and whether a threshold for rate hikes is provided.
• Whether Hammack, Logan, and Kashkari cast hawkish dissenting votes.
• June core PCE, the PCE deflator, and personal income and spending data.
• The Q2 Employment Cost Index, especially private-sector wage and benefit components.
• The advance Q2 GDP reading and final sales to private domestic purchasers.
• The new tariff exemption list, USMCA negotiations, and progress in the Section 301 investigation.
• Consumer confidence, jobless claims, and labor market divergence indicators.