Summary of Key Points
On July 29th, the Federal Reserve (Fed) maintained its benchmark interest rate at 3.5%-3.75%, in line with market expectations. However, it witnessed a rare internal disagreement among its members—three officials voted against raising the rate by 25 basis points immediately (for the first time since 2016 that three people held the same position). Chair Jerome Powell sent a strong hawkish signal, emphasizing that the Fed is committed to a firm inflation target of 2% and will no longer provide "forward guidance" (i.e., it will not predict interest rate trends in advance), leaving the market to interpret economic data on its own. Additionally, AI investment has become a new variable in policy-making, which could either mitigate inflation or drive up prices. The market was hit by three major factors: tensions in Iran, hawkish Fed stance, and doubts about the potential of AI investments. As a result, the Dow Jones Industrial Average plummeted by 1,153 points, the largest single-day decline in nearly 15 months, and the yield on 30-year U.S. Treasury bonds reached a new high since 2007. Gold prices also rose.
Detailed Analysis
1. Interest Rates Remain Unchanged, but Internal Disagreement is Rare
While most market participants were prepared for the Fed not to raise rates (futures markets estimated the likelihood of no rate hike at nearly 70%), the collective opposition from three officials was unexpected. The chairmen of the Cleveland, Minneapolis, and Dallas Federal Reserves all advocated for a 25-basis-point increase. This is the first time since 2016 that three members have opposed current policy. Experts believe this disagreement is a significant indication of growing internal divisions within the Fed regarding whether to continue raising rates. Inflation has been above the 2% target for five consecutive years, with hawks arguing that action is necessary now, while doves may wish to wait and see more data. The chief investment officer at Morgan Asset Management stated, "The dissenting votes are more important than the decision not to raise rates; they suggest that upward pressure on interest rates will persist in the future."
2. Powell's Tough Stance: Inflation Must Return to 2%, No More Predictions
Powell's remarks at the press conference were firm and clear:
- Unwavering Commitment to Inflation Target: He emphasized that there is no flexible target other than 2% and dispelled the notion that the Fed might tolerate high inflation. He warned, "If inflation does not come down, raising rates will be the best option."
- No More Forward Guidance: The Fed used to provide hints about future rate moves, but now Powell intends to stop doing so, urging the market to rely on economic data for its own predictions. He stated, "The market should follow the data, not our words."
In other words, the Fed is no longer acting as a "market nanny," and investors must guess how interest rates will develop on their own—this has increased market uncertainty.
3. AI as a New Challenge for the Fed
A notable aspect of the meeting was Powell's recognition of AI as a critical factor in policy evaluation for the first time. He mentioned that investment in AI-related technology and software has been growing at nearly 20% in the past four quarters. However, the impact of AI on inflation is ambiguous:
- Positive Potential: AI could increase productivity and boost supply, potentially helping to reduce inflation.
- Negative Potential: The demand for AI-related products (chips, infrastructure) could drive up prices, exacerbating inflation.
Powell acknowledged, "We are still unsure how AI will affect prices, which makes policy-making more difficult."
4. Market Shock: Dramatic Drops and New Highs
The market was hit by three negative factors:
- Reignited Tensions in Iran: Oil prices soared by 8%, pushing Brent crude back above $90 per barrel and raising inflation expectations.
- Hawkish Fed Signals: The internal disagreement and Powell's tough stance raised concerns about more frequent rate hikes.
- Doubts about AI Investments: Investors began to question whether AI investments will truly generate long-term benefits.
The consequences were severe:
- The Dow Jones Industrial Average fell by 1,153 points (2.19%), the largest single-day drop since April 2025.
- The yield on 30-year U.S. Treasury bonds exceeded 5.2%, reaching a new high since 2007, indicating higher borrowing costs.
- Gold prices rose by 0.87% due to safe-haven demand, briefly exceeding $4,100 per ounce.
- The U.S. dollar weakened by 0.62% as investors worried about the impact of rate hikes on the U.S. economy.
In Conclusion
The real focus of the Fed meeting was not the decision to keep interest rates unchanged but the internal disagreements and the hawkish stance. This suggests that U.S. interest rates may continue to rise in the future, and markets need to be prepared for this. The uncertainty surrounding AI adds another layer of complexity to economic forecasts. Investors will need to closely monitor inflation data and the actual effects of AI investments in the coming days.