Divided Fed stays the course as inflation remains above target

July 29, 2026

Richard Schmidt

In a move that was mostly anticipated, the U.S. Federal Reserve (Fed) left its target benchmark interest rate range unchanged at 3.5-to-3.75% following its July Federal Open Market Committee (FOMC) meeting. This marks the second policy decision under new Chairman Kevin Warsh where the Fed chose to hold rates steady as it continues to assess incoming economic data and the path of inflation. After voting unanimously in June, three voting members preferred to increase rates in July, keeping markets on high alert for a rate hike in the near term. Interestingly, three dissents in the same direction is the most since 2016.

July’s straightforward statement, almost mirroring what was released in June, reflects the new Chairman’s distaste for forward guidance. Since taking the helm, Chairman Warsh has emphasized a more measured and data-dependent approach to monetary policy. While markets initially expected significant policy changes, the first two meetings of his tenure have proven otherwise. The decision reinforces our view that the Fed is willing to remain patient while assessing whether inflation is transient or not.

The Fed continues to find support in the underlying strength of the U.S. economy. Economic activity has remained on a positive trajectory, supported by healthy business investment, productivity gains and a stable labour market. While uncertainty and risks persist, given A.I. concentration, the conflict in the Middle East and volatile energy prices, the broader economic backdrop continues to outperform what many forecasters have expected.

Notably, FOMC member views on the future of interest rates have been diverse. Despite maintaining the current rate range, opinions differ on what may be required over the coming months. Some support maintaining current rates for an extended period, while others remain concerned that inflation could prove more persistent and require additional tightening. Among those that believe higher rates are in order, there is disagreement on how much tightening is required.

This divergence is another reason why market volatility may remain elevated. Inflation reports, employment data and signs of changing consumer demand could all influence expectations regarding future Fed policy decisions. We continue to see the Fed making no changes to policy for the remainder of 2026, which is now an out-of-consensus position. Admittedly, we would be more confident in this call if energy markets normalized in the near term.

The strategic asset allocation of our clients' portfolios remains unchanged. We continue to focus on the long-term, building around long-term goals, long-term time horizons and long-term capital market expectations, which remain little changed. In client portfolios that include a tactical asset allocation component, over the next 12-to-18 months, where opportunities and risks are a bit clearer, we continue to be tactically overweight equities relative to fixed income and cash.

The current environment, where uncertainty remains elevated and various forces are influencing economic and market outcomes, reinforces the value of professional portfolio management. Diversification across multiple asset classes, regions, styles and sectors remains as important as ever. As always, we will continue to monitor and assess economic developments, policy decisions and market conditions as they evolve.

The next Fed interest rate announcement is scheduled for September 16, 2026, and will be accompanied the latest Summary of Economic Projections report.

Richard Schmidt, CFA, is a Portfolio Manager with the Multi-Asset Management Team of Scotia Global Asset Management. His primary focus is on North American equity funds and pools.