Federal Reserve Holds Rates Steady Amid Slower Growth
Federal Reserve Holds Rates Steady Amid Slower Growth
- The economy grew at a slower pace in the second quarter: Real GDP increased at an annual rate of 1.5% in the second quarter of 2026, down from a 2.1% rise in the first quarter and below consensus expectations. The change in the second quarter mostly reflects a slowing in government spending and a reduction in the growth of investments and exports, which grew at annual rates of 3.0% and 4.5%, respectively.
- What it shows: In the first half of 2026, GDP grew at an annual rate of 1.8%, down slightly from the 2.0% seen in the first half of 2025. Growth this quarter was led by investment and consumer spending. Furthermore, equipment and intellectual property products investments rose 15.2% and 8.8%, respectively.
- Another measure of inflation slowed in June: After the previously released CPI and PPI inflation measures accelerated in June, the PCE price index followed suit. The PCE price index, the preferred inflation gauge for the Federal Reserve, decreased 0.1% over the month and 3.7% over the year, down from the 4.1% year-over-year increase in May. Prices for goods declined 0.6%, while prices for services inched up 0.1%.
- Why it matters: As falling energy prices helped moderate inflation in June, the PCE price index saw its first monthly decline since April 2020. At the same time, when excluding food and energy, the core PCE price index advanced 0.1% over the month and 3.3% over the year, well above the Federal Reserve’s 2% target.
- Texas manufacturing expansion accelerates as price pressures weaken: In July, Texas factory activity expanded at a faster pace after weakening the prior month. The production index increased from 4.1 to 10.1, while the new orders index stepped up 4.1 points to 6.4. Meanwhile, the shipments index moved up 1.7 points to 8.8, climbing above the series average of 7.8.
- What to look for: In line with expansion, perceptions of business conditions and the company outlook both rose in July. Further, price pressures weakened as prices paid for raw materials decreased 1.1 points and prices received for finished goods declined 3.0 points. Looking forward, the future company outlook index inched up 0.2 points to 28.7, remaining above the series average of 18.3 after jumping 12.0 points in June.
- The Federal Reserve kept rates steady amid slowing inflation: As anticipated, the Federal Open Market Committee maintained its interest rate target range at 3.50%–3.75% at its July meeting. Three FOMC members—Beth Hammack, Neel Kashkari and Lorie Logan—supported raising the target rate by 0.25%.
- Why it matters: The committee held rates steady as lower energy prices softened the risk to the inflation side of the dual mandate. Following the decision to keep interest rates unchanged, markets now anticipate the FOMC will raise rates at its September meeting.
- Manufacturing activity expanded at a faster pace in Richmond: The composite manufacturing index in the Fifth District ticked up from 4 to 5 in July. Shipments rose from 4 to 8, while new orders moved down from 8 to 5. Meanwhile, the local business conditions index turned positive, climbing from -1 to 10.
What it means: Despite a strengthening of business conditions, manufacturers are slightly less optimistic about the future, with the outlook for future local business conditions declining from 22 to 19 in July. At the same time, firms’ expectations on capital expenditures and equipment and software spending turned negative, falling from 7 to -6 and from 7 to -5, respectively.
Information courtesy of NAM by Michael Green.
