The global rate story shifted significantly on Tuesday without any major central bank actually moving their policy rates, as reported by Reuters. ECB policymakers are ready to raise the deposit rate from 2.25% to 2.50% in September, provided incoming inflation data do not upset the case. In Australia, RBA minutes showed the Board had explicitly debated a 25bp increase before holding at 4.35%, with several members judging that upside inflation risks could still require further tightening. The Bank of England already has the same shape with its July vote being 6-3 to keep Bank Rate at 3.75%, with three members preferring 4.00%. This represents a tougher capital-allocation test for economies that cannot match the global policy floor, with China's Q2 growth slowing to 4.3% year-on-year while manufacturing expanded 4.8%.
Four regional Federal Reserve banks backed an increase in the emergency lending rate charged to commercial banks in the days before the U.S. central bank's July policy meeting, according to latest reports. As per Walter Bloomberg, the boards of four regional Fed banks recommended raising the discount rate ahead of the July FOMC meeting. The discount rate represents the rate the Fed charges when it lends directly to financial institutions. Directors at the Cleveland, Dallas, Minneapolis and Kansas City Federal Reserve banks recommended raising the primary credit rate by a quarter of a percentage point, with recommendations submitted as early as July 16 and as late as July 23. The recommendations came ahead of the Federal Reserve's July 28-29 policy meeting, where policymakers voted 9-3 to maintain the benchmark interest rate at 3.5% to 3.75%. The discount rate process is separate from the FOMC's more closely watched federal funds rate decisions, with regional bank directors meeting regularly to recommend rates to the Board of Governors in Washington.
The three regional banks whose directors supported the increase in Cleveland, Dallas and Minneapolis were represented by Fed presidents who dissented from the July policy decision. The Kansas City Fed also backed the increase, although its president, Jeff Schmid, does not hold a vote on the policy-setting Federal Open Market Committee this year. According to Reuters, the rate recommendations were overruled when Fed policymakers decided in a 9-3 vote to leave the policy rate unchanged at their July 28-29 meeting. The split comes as Fed officials weigh competing risks, including inflation that remains above the central bank's longer-term objective and signs of weakness in parts of the U.S. economy. The FOMC voted 9-3 to hold in July, with three of its twelve voters wanting a hike - Beth Hammack of Cleveland, Neel Kashkari of Minneapolis, and Lorie Logan of Dallas. This marked the most hike dissents since September 2016, highlighting the growing internal divisions within the Fed.
Regional directors reported generally stable economic expansion and steady job growth, though several noted persistent labor shortages for specialized positions and ongoing investments in artificial intelligence to boost operational efficiency. However, directors repeatedly raised red flags about heightened consumer price sensitivity and rising fuel costs driven by global tensions. The latest Consumer Price Index report showed headline inflation running at 3.4% year over year, driven largely by elevated energy costs, which remains well above the Fed's 2% target. Market pricing reflects this uncertainty, with futures traders placing a 65.6% probability on the Fed holding rates steady at its September 16 meeting, according to the CME FedWatch Tool, while the odds of a quarter-point hike have fallen to 34.4% from 41.4% in prior weeks. Looking further ahead, futures markets are pricing in less than a 25% chance of any policy easing before year-end.
Separately, a group of Democratic senators sent a letter to Fed Chair Kevin Warsh expressing concern over a proposal to reduce the number of FOMC meetings per year from eight to six. The letter, signed by Senators Ruben Gallego, Andy Kim, Chris Van Hollen, Angela Alsobrooks, Elizabeth Warren, Catherine Cortez Masto, and Tina Smith, argued that reducing meeting frequency would amount to "unilaterally changing the way the Fed communicates with markets and the American public." The senators wrote that "The Fed's job is to track the economy in real time, not to pay less attention and hope for the best," and warned that reducing transparency would put the broader economy at risk. The push for fewer meetings comes at a time when the central bank is already grappling with significant internal divisions over policy direction, with the latest reports confirming that divisions within the Fed over interest-rate policy are widening as officials determine future rate policy.
