Federal Reserve Policy

The US economy expanded at a 1.5% annual rate in the second quarter of 2026, falling short of the 2% forecast and decelerating from 2.1% in the first three months of the year.

Consumer spending proved resilient, rising 3.2% year-over-year, a sharp rebound from the 0.5% pace set in the first quarter. However, broader price gauges pointed to stubborn inflation. The GDP price index climbed 6.2% year-over-year, while the PCE price index eased to 3.7% in June, down from 4.1% a month earlier.

The data landed as the Federal Reserve held interest rates steady for a fifth consecutive meeting in July. Dissenting voices from three regional Fed presidents pushed for a rate hike — the first such dissent in a decade. Corporate investment, led by spending on AI equipment, remained a key driver of activity.

U.S. stocks suffered their steepest drop since April 2025, with the Dow Jones Industrial Average tumbling 1,153 points, or 2.2%, as escalating tensions between Washington and Tehran rattled investors. The S&P 500 slid 1.5% and the Nasdaq Composite fell 1.7%, ending more than 10% off its all-time high.

The selloff followed President Donald Trump's pledge to strike Iran "hard" after U.S. Central Command intercepted missiles targeting American military facilities in the Middle East. West Texas Intermediate crude futures surged more than 6% to $84.46 a barrel. Semiconductor shares bore heavy losses, with the SOX index dropping over 5%, though UBS argued the sector's selloff is overblown.

The Federal Reserve held interest rates at 3.5–3.75%, with three regional bank presidents dissenting in favor of a quarter-point hike. The 30-year Treasury yield jumped above 5.2%, its highest since 2007. Fed Chairman Kevin Warsh said the central bank will not hesitate to act when necessary.

The Bank of England kept its key interest rate at 3.75% on 2026-07-30, marking the fifth consecutive hold as policymakers weighed persistent inflation risks against a cooling domestic economy. The Monetary Policy Committee voted 6-3 to maintain rates, with three members calling for an immediate increase to 4%.

UK inflation fell to 2.6% in June 2026, but the central bank warned that geopolitical tensions could push prices higher. Brent crude oil briefly rose above $100 a barrel in July, and the Bank cautioned that if conflict persists, inflation could reach 4.1% with energy costs remaining elevated.

The decision follows the US Federal Reserve's move to keep its key rate at 3.5%-3.75% the previous day. Domestically, Andy Burnham announced the removal of VAT on electricity bills, cutting household costs by £45 annually.

US government borrowing costs surged to their highest levels since 2007 on Wednesday after the Federal Reserve held its benchmark rate steady, with the 30-year Treasury yield climbing 14 basis points to nearly 5.24%.

The decision to maintain rates at 3.50%–3.75% for a fifth consecutive meeting was not unanimous, with three officials — Beth Hammack, Neel Kashkari and Lorie Logan — dissenting in favour of a quarter-point increase. Chair Kevin Warsh said the bank would "not waver" in its commitment to tackling rising prices. The hold came as second-quarter GDP grew just 1.5%, missing expectations of 2.0%.

Equities sold off, with the S&P 500 closing down 1.5%, the Dow Jones falling 2.2% and the Nasdaq dropping 1.7%. Meanwhile, the Bank of England also held its rate at 3.75% but warned that an escalation in the Iran conflict could push inflation above 4% next year.

Federal Reserve officials project inflation will cool to 2.3 percent in 2027 from an estimated 3.6 percent this year, offering a longer-term outlook after the central bank held its benchmark rate steady at 3.50–3.75 percent on Wednesday.

The forecasts accompanied the fifth consecutive pause since December, a decision backed by nine members of the policy committee with three dissenters favoring a quarter-point increase. In June, half of the 18 surveyed Fed members anticipated at least one rate hike before year's end, a sentiment echoed as observers now expect a move at the September 16 meeting, the central bank's next scheduled announcement.

Chair Kevin Warsh, who took the helm earlier this year, has presided over two consecutive holds since his first meeting in June.