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The July 29-30 FOMC meeting marked a watershed moment in monetary policy, delivering the first instance since 1993 of two Fed governors dissenting from the majority decision. Governors Michelle Bowman and Christopher Waller both voted for an immediate 25 basis point cut, arguing that the labor market showed concerning deterioration while inflation excluding tariff effects had moved considerably closer to target. Their break from Chair Powell's cautious stance exposed fundamental disagreements about how to handle tariff-induced price pressures amid weakening growth—a debate that will dominate policy discussions as the September meeting approaches.

Credit Pulse

Credit markets exhibited remarkable resilience despite the week's dramatic volatility, with investment grade spreads widening just 4 basis points to 75bp while remaining at the 22nd percentile of their 5-year range. High yield showed more stress, widening 25bp to 289bp, but still sits at just the 24th percentile historically—suggesting either dangerous complacency or confidence that Fed easing will support corporate fundamentals. The VIX surge of 5.45 points to 20.38 better captured the week's turmoil, jumping from below-average levels to the 59th percentile as equity markets grappled with growth fears.

Federal Reserve Policy Outlook – September Cut Now Consensus

The dramatic repricing of Fed expectations following Friday's employment disaster leaves little doubt that the September 17-18 FOMC meeting will deliver the first rate cut of this cycle. Market pricing shifted from just 37% probability before the jobs data to over 80% after, with some dealers now calling for 50 basis points rather than the standard 25bp move if August employment data confirms continued deterioration. The question has shifted from whether the Fed will cut to how aggressively it will need to move to prevent a deeper downturn.

Governor Waller's August 1 statement explaining his dissent now reads as prophetic. His argument that standard central banking practice calls for "looking through" one-time price level increases from tariffs rather than maintaining restrictive policy resonates more strongly after the employment collapse. With real GDP growth at just 1.2% in the first half and labor markets cracking, his call for policy "close to neutral, not restrictive" appears increasingly justified. The philosophical divide he exposed—whether to prioritize tariff-induced inflation or weakening growth—will likely be resolved decisively in favor of supporting employment given Friday's data.

Week Ahead: Data Dependence Intensifies Before Jackson Hole

• Consumer Price Index (August 12): July CPI takes on enormous importance as the Fed weighs tariff impacts against growth concerns. Consensus expects 0.2% monthly and 2.7% annually, but any upside surprise could complicate the easing narrative despite weak employment.
• Producer Prices (August 13): PPI data will reveal how much tariff pressure is building in the pipeline. With copper and Brazilian goods facing new 50% duties from August 1, early signs of pass-through could emerge.
• Retail Sales (August 15): July retail sales will show whether consumers are retrenching as employment weakens. Consensus expects -0.3% decline as job market uncertainty weighs on spending.
• Industrial Production (August 16): Manufacturing data becomes critical to assess whether weakness is spreading beyond services. The sector has contracted for three straight months.
• University of Michigan Sentiment (August 16): Consumer confidence and especially inflation expectations will be closely watched for signs that tariff impacts are becoming embedded in psychology.

US Economic Positioning – Fed Behind the Curve as Recession Risks Rise

The violent market reaction to this week's developments suggests investors believe the Federal Reserve has committed a serious policy error by maintaining restrictive rates too long. The historic dissent from two respected governors, followed immediately by devastating employment data, creates a narrative of a central bank that misread the economy's fragility while fixating on tariff-driven price pressures that monetary policy cannot address. With the 2-year yield collapsing 24 basis points in a week and rate cut probability surging to 80%, markets are screaming for immediate action.

Global divergence widens: While the Fed paralyzed itself over tariff inflation, other major central banks moved decisively to support growth. The ECB's steady easing campaign, Bank of Japan's continued accommodation, and China's aggressive stimulus stand in sharp contrast to the Fed's hesitation. This policy divergence helped support the dollar despite growth concerns but creates additional complications as currency strength amplifies the deflationary impulse from weakening domestic demand. For fixed income investors, the setup increasingly resembles previous policy error episodes where the Fed's late pivot required more aggressive easing than timely action would have demanded. Credit markets' failure to adequately price recession risk at the 22nd-24th percentile of spreads suggests the repricing process has only just begun.