Monetary Policy
Federal Funds Rate
3.63%
The FOMC voted 9-3 on July 29 to hold the target range at 3.50–3.75% — but the July 7 jobs shock has significantly reshuffled September's odds. Three dissenters (Hammack, Kashkari, Logan) had pushed September hike probability to 72% post-decision. But the July employment report — released August 7 — showed employers shed 23,000 jobs, the first payroll loss in years, with prior months revised down a combined 146,000. CME FedWatch repriced dramatically: September hike odds collapsed to 40%, with hold probability rising to 60%. Chair Warsh has not spoken publicly since the jobs report. The data conflict now defines the September decision: three dissenters demanding tightening on labor strength versus a headline jobs loss that looks like a rate-hike casualty. August 12 CPI is the deciding vote.
In plain termsThe Fed held rates on July 29, but the picture changed sharply this week. Employers shed 23,000 jobs in July — the first payroll loss in years — and September hike odds fell from 72% to 40%. For borrowers, nothing changes immediately (rates at 3.50–3.75%), but the probability of a September hike has dropped meaningfully. The next critical data point is the July CPI report on August 12: if inflation holds or falls, September becomes a likely hold; if CPI ticks back up toward 4%, the three hawkish dissenters gain the upper hand and a hike remains live. The September 16–17 FOMC decision is genuinely too close to call.
Inflation ⚠ WATCH
Consumer Price Index (YoY)
3.5%
June 2026 CPI rose 3.5% year-over-year — the first meaningful decline since the Iran-driven energy surge began, falling sharply from May's 4.2% and beating the 3.9% consensus forecast. Energy prices fell 5.7% month-over-month in June (the largest single-month decline since April 2020), pulling the annual energy reading from 23.5% to 15.7%. Core CPI, excluding food and energy, eased from 2.9% to 2.6% — the lowest core reading since early 2025, and below the 2.8% forecast. Shelter costs decelerated to 3.3% YoY. The June CPI was a key factor in the majority's July 29 hold decision, and it contributed to June Core PCE easing to 3.3%. The critical question now: will July CPI (due August 12) hold the disinflationary trend, or will oil prices re-surging to near $90 in late July push the headline back toward 4%?
In plain termsInflation fell meaningfully in June — from 4.2% to 3.5% — largely because gasoline and energy prices dropped sharply from Iran-related highs. Strip out energy, and core prices are up just 2.6%, the best reading in over a year. The next CPI report — covering July — comes August 12 and is now the most important single data point before September's FOMC. The calculus shifted this week: with July payrolls showing a 23,000 job loss, September hike odds fell to 40% from 72%. If August 12 CPI shows continued disinflation, a September hold becomes the base case. If CPI reverses toward 4%, the hike stays live — and three FOMC dissenters will be waiting.
Labor Market
Unemployment Rate
4.1%
July 2026 nonfarm payrolls declined by 23,000 — the first outright job loss in years and a jarring miss against the 83,000 consensus forecast. The BLS also revised May and June down by a combined 146,000, meaning the prior two months were weaker than reported. The unemployment rate technically fell from 4.2% to 4.1%, but the mechanism — as in June — is troubling: labor force participation slipped to 61.4%, and long-term unemployment held at 1.8 million (25.5% of all unemployed). Local government education and retail trade posted the largest declines. The "slow-hire, no-fire" labor market paradox has reached a new phase: layoffs remain historically rare (jobless claims 199k), yet employers are no longer adding jobs in aggregate. The labor market is cooling faster than it appeared even one month ago.
In plain termsThe headline unemployment rate fell to 4.1%, but the real story is that employers actually shed 23,000 jobs in July — the first payroll loss in years — and prior months were revised down by 146,000 combined. If you're job-hunting right now, the market is meaningfully harder: new openings are shrinking and hiring in education and retail reversed sharply. The silver lining is that layoffs remain very low (jobless claims 199k), so if you have a job, you're relatively secure. The weak July report was the trigger that dropped September hike odds from 72% to 40% — bad news for job-seekers may mean relief from further rate hikes for borrowers.
Economic Output
GDP Growth Rate (Q2 2026, Adv. Est.)
+1.5%
The BEA's advance estimate for Q2 2026 GDP, released July 30, came in at +1.5% annualized — a meaningful deceleration from Q1 2026's final +2.1% and below the 2.1% consensus forecast. Consumer spending remained the primary driver of growth, while government spending was a headwind. The Q2 reading is the first soft-ish quarter in three, but still firmly above zero: the economy is decelerating, not contracting. Released the morning after the FOMC held rates 9-3, the softer GDP print gave the majority their clearest justification — a slowing economy calls for patience, even if three dissenters disagreed. Two more GDP estimates (second and final) will revise this reading before year-end.
In plain termsGDP measures the total output of the US economy. The first read on Q2 2026 shows the economy grew at a +1.5% pace — still positive, but slower than Q1's +2.1%. This is a yellow flag, not a red one: a recession requires back-to-back negative quarters, and we're still in positive territory. The slowdown reflects lower government outlays and some consumer caution. The week's July jobs loss (-23,000 payrolls) adds downside risk to Q3 growth — if hiring contracts further, consumer spending could soften and Q3 GDP could slip toward 1.0%. September hike odds are now 40% (down from 72%), and the possibility of a hold is growing.
Fixed Income
10-Year Treasury Yield
4.65%
The 10-year Treasury yield fell to 4.65% on August 7 — down 9 basis points from July 31's 4.74% — in an immediate market reaction to the July jobs miss. Employers shed 23,000 payrolls against an 83,000 forecast, and bond markets re-priced September dramatically. The 2-year yield dropped to 4.20% (down 9 bps), while the 30-year fell to 5.21% (down 7 bps). The 2s10s spread held at +45 bps; the 3m10y narrowed slightly to +92 bps — but the curve remains firmly normal-shaped. The Treasury market's message: the labor market is cracking, the Fed may not need to hike in September, and terminal rates may not reach the 4.00%+ that markets priced a week ago. The ball is now in August 12 CPI's court.
In plain termsThe 10-year Treasury yield fell to 4.65% after the July jobs loss, pulling down the floor for mortgage rates. A 30-year fixed mortgage now likely costs around 7.1–7.3%, meaning a $400,000 home loan runs approximately $2,700–$2,750 per month in principal and interest — slightly improved from last week's 7.3–7.5%. September hike odds dropped to 40%, so further rate increases are no longer the market's base case. If August 12 CPI confirms the disinflationary trend, the 10-year could test 4.50% and 30-year mortgages could edge below 7.0% — the first meaningful relief for homebuyers in over a year.
Consumer Activity
Retail Sales Growth (YoY)
6.7%
June 2026 retail and food services sales reached $768.6 billion — up 6.7% year-over-year and 0.2% month-over-month, the fifth consecutive monthly gain. The softer monthly pace reflects lower gasoline station receipts (down 5.3% on cheaper pump prices), partially offset by solid gains in nonstore retailers and sporting goods. Total sales for April through June are up 6.4% from a year ago. The slight deceleration from May's 6.9% annual rate is not alarming — gasoline deflation mechanically pulls the number lower — and core retail sales (excluding autos and gas) remain robust. Released July 16, the data confirm that consumers continued spending through June's labor market softness.
In plain termsAmericans kept spending solidly in June — retail sales grew 6.7% year-over-year, the fifth straight monthly gain. The slight dip from May's 6.9% is largely explained by cheaper gas prices pulling down receipts at gas stations. Strip that out and consumer spending remains healthy. The key question now: after July's 23,000 job loss and prior-month downward revisions of 146,000, will consumer spending durability hold in Q3? July retail sales data arrives around August 15 and will offer the first read on whether the jobs shock is feeding through to spending.
Money Supply
M2 Money Supply Growth (YoY)
5.5%
M2 grew 5.5% year-over-year through June 2026, per the Federal Reserve's H.6 release published July 28 — a slight moderation from May's 5.6%. Total M2 now stands at $23.16 trillion. The July 28 release also introduced a methodological change: IRA and Keogh retirement balances are now netted directly as a separate M2 component rather than through sub-components. Despite the minor monthly easing, M2 remains at its fastest sustained growth rate since the post-pandemic era, and at levels that historically precede inflation by 12–18 months. One month's moderation does not resolve the structural overhang.
In plain termsM2 measures all the money circulating through the economy — cash, checking accounts, savings, and money market funds. At 5.5% growth, there is still more money in the system than the economy needs at current production levels. This excess liquidity is a structural force keeping everyday prices elevated: historically, rapid M2 growth feeds into higher consumer prices 12–18 months later. The slight step-down from 5.6% in May to 5.5% in June is a start, but the rate needs to fall much further — and sustained — before this pressure on prices meaningfully lifts.
Inflation
Core PCE Price Index (YoY)
3.3%
June 2026 Core PCE — the Fed's preferred inflation gauge — eased to 3.3% year-over-year (BEA, Personal Income and Outlays, released July 30), down from May's 3.4%. This is the first monthly decline in the Fed's preferred inflation measure after 14 consecutive months of re-acceleration — a meaningful, if tentative, turning point. Monthly PCE rose 0.3% in June, with personal income up 0.2% and the personal saving rate at 2.7%. The metric remains 1.3 percentage points above the Fed's 2% target, and one month of improvement does not constitute a trend — but June's June CPI core reading (2.6%) had telegraphed exactly this improvement. The Dallas Fed's Trimmed Mean PCE came in at +2.2% YoY, suggesting underlying inflation pressures may be easing more broadly than the headline Core PCE implies.
In plain termsCore PCE is the Fed's preferred inflation yardstick — it strips out food and energy to measure the underlying pace of price increases. At 3.3%, it's still above the 2% target. But for the first time in over a year, the number went DOWN instead of up — from 3.4% to 3.3%. That's the direction the Fed needs to see. For borrowing costs to come down, the Fed needs to see several more months of this improvement. For now, rates stay high — but this is the first genuine sign that the 14-month re-acceleration may be ending.
Economic Output
ISM Manufacturing PMI
55.6
July 2026 ISM Manufacturing PMI surged to 55.6 — up 2.3 points from June's 53.3 and the highest reading since May 2022, a four-year high. This is the seventh consecutive month of expansion and broadly consistent with above-trend real GDP growth. The advance was broad-based: 15 of 18 industries reported expansion. Production jumped 6.3 points to 58.5 — its highest since November 2021. New orders rose to 56.7 from 56.0, and the employment sub-index crossed above 50 for the first time in 33 months (52.8 from 49.7), suggesting factory hiring is now expanding after nearly three years of contraction. The Prices Index eased to 71.1 (third straight monthly decline), offering an ongoing factory-floor disinflation signal. The manufacturing print creates a notable tension with the jobs report — the same week employers shed 23,000 payrolls, manufacturing managers reported accelerating demand.
In plain termsA monthly survey of factory purchasing managers — any reading above 50 means manufacturing is growing, below 50 means it's shrinking. At 55.6, U.S. factories are expanding at their fastest pace in four years, and for the first time in nearly three years, manufacturers are actually adding workers (employment index crossed above 50). The paradox this week: factory output is surging while the broader labor market shed 23,000 jobs. For consumers, the manufacturing strength could translate into slightly lower goods prices over coming months — factory input costs have declined for three straight months. For the Fed, a booming factory sector complicates the case for a hold at September's meeting.
Labor Market
Initial Jobless Claims (4-wk avg)
199k
The 4-week moving average of initial jobless claims fell to 198,750 for the week ending August 1, 2026 — released August 6 — down from 203,250 the prior period. The weekly print was 199,000. The claims data stands in striking contrast to the July payrolls report, which showed employers shedding 23,000 jobs: layoffs remain near historically rare levels, yet hiring has effectively stopped in aggregate. This bifurcation — minimal firings alongside zero net job creation — suggests employers are hoarding existing workers while sharply curtailing new hiring. The "no-fire, no-hire" dynamic creates an unusual Fed policy dilemma: claims data supports the hawkish dissenters' position (economy isn't breaking), while the payrolls loss supports the hold majority's case for patience.
In plain termsEvery week, the government counts how many people filed for unemployment benefits for the first time. This week, 199,000 people filed. The 4-week average fell to 198,750 — below 200,000 for the first time in years. If you have a job right now, you're in an unusually secure position — employers are essentially not firing anyone. But the paradox is that employers are also not really hiring, either: July payrolls fell by 23,000. With September hike odds now at 40% (down from 72%), the strong layoff picture no longer dominates the Fed debate — the job loss does. Next critical reading: Jobless Claims for week ending August 8, released August 14.
Source: U.S. Bureau of Labor Statistics, Consumer Price Index — June 2026 (released July 14, 2026)
The Bifurcated Economy: July Payrolls Fall 23,000 — First Job Loss in Years — as ISM PMI Hits Four-Year High; September Hike Odds Collapse from 72% to 40%
July jobs -23k (first loss in years), September hike repriced to 40%, ISM PMI 55.6 (four-year high), 10Y Treasury 4.65% — By Connor Leary, August 9, 2026
The July jobs report delivered one of the most dissonant economic weeks of the current cycle. On the same day employers shed 23,000 nonfarm payrolls — the first outright job loss in years, versus a consensus forecast of +83,000 — the ISM Manufacturing PMI surged to 55.6, its highest reading since May 2022. Factory production hit a five-year high (58.5), manufacturing employment crossed above 50 for the first time in 33 months, and 15 of 18 industries reported expansion. The bond market processed this contradiction swiftly: the 10-year Treasury fell 9 basis points to 4.65%, the 2-year fell 9 basis points to 4.20%, and September FOMC hike odds collapsed from 72% to 40% within hours of the payrolls release. This is now a genuinely bifurcated economy — surging factory output, zero net job creation — and the September FOMC meeting is the most contested in years.
The payrolls miss was not merely a weak number; it was accompanied by substantial prior-month revisions. May and June were revised down by a combined 146,000 jobs, meaning the labor market has been softer for months than the earlier data suggested. The unemployment rate fell from 4.2% to 4.1%, but again by the wrong mechanism: labor force participation slipped to 61.4%. The "slow-hire, no-fire" paradox that defined mid-2026 has evolved into something new — what might be called "no-hire, no-fire": jobless claims remain at a near-historic low of 199k (4-week average), but employers added fewer workers in July than in any month in years. The Fed's three hawkish dissenters — Hammack, Kashkari, Logan — had argued that labor market resilience justified immediate tightening. That argument lost considerable ground on August 7.
"Factory output at a four-year high; payrolls negative for the first time in years. September's FOMC is now genuinely too close to call."
The timing of August 12's CPI release could not be more consequential. Before the July jobs shock, September at 72% hike probability looked like a near-certainty — the hawks had three dissenters, Chair Warsh had avoided a personal lean toward the hold camp, and the dot plot from June showed 9 of 18 members projecting a 2026 hike. Now, with September at 40% hike probability and a jobs loss on the books, the August 12 CPI is effectively the casting vote. A print that continues the June disinflation trend (3.5% YoY or lower) — combined with a July jobs loss — would give the hold majority overwhelming cover to keep rates at 3.50–3.75% and leave September's dot plot ambiguous. A reversal back above 4%, however, would put the dissenters' case in its strongest position yet: inflation re-accelerating alongside a weakening labor market is precisely the stagflationary scenario that argues for aggressive pre-emptive tightening.
The Treasury market has already moved in one direction. The yield curve fell roughly in parallel across all maturities — a classic "risk-off" re-rating of the Fed's terminal rate. The 30-year Treasury declined to 5.21% from 5.28%; the 2s10s spread held at +45 basis points, maintaining the normal curve shape but at lower absolute yields. For mortgage borrowers, the shift is meaningful: 30-year fixed rates have dropped from approximately 7.3–7.5% to 7.1–7.3%, with the possibility of a test of 7.0% if August 12 confirms the disinflationary trend. The ISM PMI Prices Paid index fell for a third consecutive month (71.1), adding factory-floor confirmation that goods inflation is easing. The structural inflation picture — Core PCE at 3.3%, M2 at 5.5% — remains elevated but is moving in the right direction.
The macro framework entering the September decision is as complex as any point in this cycle. Growth is decelerating (Q2 GDP advance +1.5%), hiring has gone negative, but manufacturing is booming, layoffs are non-existent, and consumers were still spending robustly through June (+6.7% retail YoY). The Fed simultaneously faces the risk of over-tightening into a hiring contraction and under-tightening with ISM prices still above 70 and Core PCE at 3.3%. One thing is clear: both the August 12 CPI and the August 15 retail sales report will arrive before September 16 with the power to move the needle significantly. The September meeting is the most important in years — and this week's data confirmed it could break either way.