The Fed funds rate

Investment Analysis Clubs Macro Economic Trends and Risks
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https://www.nytimes.com/live/2026/07/29/business/fed-meeting-rates-kevin-warsh#what-to-know-about-the-feds-decision

Fed Leaves Interest Rates Unchanged, Despite Three Votes for an Increase

Kevin M. Warsh, the Fed’s new chairman, vowed to fight persistent inflation without offering specifics about whether that would include raising rates.

by Colby Smith, The New York Times, July 29, 2026

The Federal Reserve on Wednesday kept interest rates unchanged despite growing pressure to more directly tackle inflation after five years of overshooting the central bank’s 2 percent target.

The Fed voted 9-3 to maintain rates at 3.5 percent to 3.75 percent, a level that has been in place since January…

The Iran war is not the only supply shock the Fed is having to navigate. President Trump is still actively adding new tariffs, and the labor market is still digesting sweeping immigration restrictions he has put in place. Officials are also dealing with booming demand for products tied to the sharp rise in artificial intelligence investment. Supply has yet to catch up, leading to higher prices on items such as semiconductors, computer chips and servers.

The debate at the Fed centers on how quickly inflation will ease from here as some of these temporary factors fade, and whether rate increases will ultimately be necessary to get back to target…

In a policy statement on Wednesday, the Fed reiterated that it would deliver price stability, describing inflation as “elevated.” It noted that economic activity was “expanding at a solid pace,” and that productivity growth and capital investment were “strong.” It also conveyed that the labor market was stable… [end quote]

Everyone knows that the combination of above target inflation, a strong economy and stable labor market is the recipe for higher fed funds rate. There’s a good reason that 3 FOMC voters wanted to raise the rate.

The FOMC statement didn’t mention the continuous pumping of fiat money into the banks with their “ample reserves” regime. Or the fiscal stimulus from government deficits enacted by Congress.

The bond market responded by steepening the Treasury yield curve. The 30 year Treasury bond jumped to 5.2%. Junk bond spreads jumped. The 10 year TIPS yield rose to 2.4%.

This is the FOMC’s way of saying, “You have to tighten.” And the bond market’s way of saying, “We don’t trust you to keep long yields stable in the long run.”

Wendy

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Is deflation the real risk before the FED?

The first result is on China’s deflation. The second result is on the unemployment rate in the US at risk because of our debt.

China’s broader economic deflation—measured by the negative GDP deflator—has persisted for over 10 consecutive quarters since 2023, while headline consumer and factory-gate inflation rates have fluctuated near or below zero due to weak domestic demand and industrial overcapacity. [1, 2, 3, 4]

Price Indices and Trends

  • Consumer Price Index (CPI): Hovered near flat-to-negative territory (ranging between -0.7% and minor positive prints like +0.2% year-on-year).
  • Producer Price Index (PPI): Remained in steep factory-gate deflation, sinking as low as -3.6% during prolonged wholesale contractions.
  • GDP Deflator: Stayed negative for multiple consecutive years, signaling an entrenched broader economic deflationary spiral. [4]

Driving Factors

  • Property Slump: A prolonged contraction in the real estate market that drained household wealth and local government revenues.
  • Industrial Overcapacity: State-driven overproduction in sectors like steel and solar chasing weak domestic demand, triggering severe price wars.
  • Weak Confidence: Plummeting consumer spending and suppressed private-sector wage growth. [1, 2]

If you’d like, I can provide more details on:Specific sector impacts (like real estate or manufacturing)Recent government stimulus and policy responsesLet me know how you would like to proceed.

AI can make mistakes, so double-check responses

[1] https://www.eurasiagroup.net/live-post/risk-7-chinas-deflation-trap

[2] https://www.bloomberg.com/graphics/2025-china-deflation-cost/

[3] https://www.reuters.com/world/asia-pacific/chinas-consumer-prices-rise-02-january-producer-deflation-softens-2026-02-11/

[4] https://www.wsj.com/world/china/deflation-doom-loop-china-economy-25b0938a

[5] https://www.cnbc.com/2025/06/09/china-cpi-ppi-may-deflation.html

[6] https://www.reuters.com/world/china/chinas-consumer-prices-rise-first-time-five-months-2025-07-09/

[7] China’s High-Tech Narrative Cannot Solve Its Deflation Problem – The Diplomat

Yes, the rising U.S. national debt poses a long-term threat to job growth through economic crowding out, though an immediate collapse in the current employment rate is not expected. [1, 2]

Long-Term Impact on Jobs

  • Crowding Out Investment: High federal borrowing drives up interest costs, which steers money into government bonds instead of private business investments that create jobs.
  • Projected Job Losses: Analyses, such as those from Peter G. Peterson Foundation, project that current debt trajectories could reduce available U.S. employment by 1.2 million jobs by 2035 and 3.6 million by 2075 compared to stabilized debt.
  • Disproportionate Effects: Younger workers and new labor market entrants are expected to face tougher competition and slower wage growth as a result. [1, 5]

Immediate vs. Structural Views

  • Current Stability: The near-term labor market has remained relatively resilient with a low-hire, low-fire equilibrium, meaning day-to-day employment is driven more by immediate consumer demand and monetary policy than the raw debt total.
  • Public Debate: On platforms like Reddit, opinions are mixed; while fiscal hawks view the $39+ trillion debt as a slow-moving crisis for labor and wages, other observers argue that corporate profits or distinct market factors play a more direct role in everyday economic strain.
  • The Default Risk: A sudden, catastrophic cut to employment (millions of jobs lost) would only materialize immediately if Congress failed to raise the debt ceiling and the government defaulted on its financial obligations. [8]

If you would like, I can provide more details on:How the crowding-out effect operates mathematicallyProjections for wage growth versus debt over the next decade

AI can make mistakes, so double-check responses

[1] https://www.thewellnews.com/federal-budget/rising-national-debt-seen-as-cooling-job-prospects-for-young-americans/

[2] https://siepr.stanford.edu/publications/policy-brief/us-economy-2026-what-watch

[3] https://www.pgpf.org/article/the-rising-national-debt-means-fewer-jobs-lower-wages-for-young-people/

[4] https://cowboystatedaily.com/2026/07/29/ken-buck-the-real-threat-to-young-americans-jobs-isnt-ai-its-the-national-debt/

[5] https://www.businessreport.com/article/growing-debt-creates-growing-risks-for-american-workers

[6] https://www.everythingpolicy.org/policy-briefs/why-the-national-debt-matters

[7] https://www.reddit.com/r/economy/comments/1uwbao7/united_states_39_trillion_national_debt_will_mean/

[8] Debt ceiling breach could cut millions of jobs. Here's who would lose employment first - Good Morning America

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On a related note, what happened following Warsh’s repeated criticisms of the growing (-again) Federal Reserve’s balance sheet, funding government deficits?

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This increase is small in the context of previous QE.

According to Gemini,

Why the Fed Is Buying T-Bills Now

  1. Keeping Reserves “Ample”: After ending Quantitative Tightening, the Fed transitioned into an operational holding pattern to keep bank reserve balances from dropping below the threshold required for smooth money-market functioning.

  2. Matching Cash Demand: As the public demands more physical currency over time, or as the Treasury General Account (TGA) fluctuates, bank reserves drain out of the system unless offset. Buying short-term bills replaces those drained reserves without stimulating borrowing or credit markets.

  3. Preventing Short-Term Rate Spikes: If reserves get too tight, short-term overnight money market rates start rising unexpectedly above the Fed’s target rate range. Buying T-bills acts as an administrative valve to keep overnight funding rates calm and steady.

The balance sheet expansion is purely maintenance to keep the financial engine lubricated, rather than stepping on the gas pedal.

The Federal Reserve’s purchases focus almost exclusively on short-term Treasury bills (T-bills) with maturities ranging from a few weeks up to one year or less.

Why Duration Matters Here

  • Near-Zero Duration Risk: Because T-bills mature so quickly, buying them adds negligible price sensitivity or interest rate risk (duration) to the Fed’s portfolio.

  • No Impact on Long-Term Rates: Unlike Quantitative Easing (QE)—where the Fed intentionally bought long-duration 10-year to 30-year Treasuries and mortgage-backed securities to lower long-term borrowing costs—short-term bill purchases leave long-term yields and term premia untouched.

  • Pure Liquidity Management: Buying short-duration paper allows the Fed to inject cash reserves into the banking system without sending a stimulative signal to credit markets or altering its monetary policy stance. [end Gemini quote]

QE was a departure from previous Fed policy because they were manipulating the long-term yields which previously were set by the bond market. They aren’t doing this now as QE.

The current policy is to let mortgage bonds roll off and buy T-bills with the money. That will reduce the duration of the Fed’s book.

The Fed isn’t letting Treasury bonds roll off. They are buying new Treasury “coupon bonds” which are 2 to 30 year duration (but not T-bills) with matured Treasuries. They are buying whatever mix of coupon bonds happen to be offered at auction on the day the Fed’s bond matures. If the mix is skewed to the short term because the Treasury Secretary want the lower interest rate the Fed might end up with a shorter duration mix.

The Fed’s purchase is non-competitive - that is, they don’t bid at the auction so they won’t affect the issue yield. They know when their bonds are maturing so they can place an order to get the auction price without changing the yield.

As an individual investor, we can place an order for any Treasury up to 3 days before its auction date to get the auction yield. If we think the yield will change after the auction we can place an order on the secondary market.

The important thing is that the Fed isn’t manipulating long-term yields anymore. The bond market vigilantes aren’t being suppressed.

Wendy

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Perhaps, although for several years following the 2022 peak, a decline was being managed. More recently, the direction has turned up again, and continues to do so, not quite in line what we may have considered telegraphed.

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You are right. But any bond investor watches the slope of the yield curve like a hawk.

The Fed’s purchases to increase bank liquidity could be inflationary since the banks might loan out the money if they find borrowers. This is a short-term impact.

The Fed’s short-duration purchases are not impacting the long duration yields. That will impact the long-term profits of business, mortgages, etc. Stock prices will be reduced since higher long-term yields will give a lower ROIC (Return on Invested Capital) especially for growth companies with low profits now but expected higher profits later.

Wendy

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Frankly I expect nothing from the Fed for several months, primarily because of the mid-term elections coming up. That’s because Warsh, in spite of his promises, won’t cross the Prez before those elections. Inflation up, inflation down, doesn’t matter. Long bond up, down, irrelevant.

There are now 4 Trump appointees serving, and he would like to make that 6 but won’t get there, at least anytime soon. The fact that there wasn’t a single vote to lower rates was telling, but not necessarily prescriptive. I’m not expecting changes of any kind (absent cataclysmic numbers elsewhere) before November.

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