What is the Fed's "dashboard" looking at?

After July’s “wait and see” stance, a sharp rise in long-term rates

The July FOMC meeting ended without any major surprises, with Walsh defending his second pause during his term at the press conference while reiterating his resolve to fight inflation. The market’s absorption of this policy decision, however, was somewhat unexpected—even as the path of rate hikes was pared back, the yield curve experienced a bear steepening: 2-year yields declined, while 10- and 30-year yields climbed by over 5bp, with the 30-year yield hitting its highest point since 2007.

All asset classes reacted simultaneously: gold prices spiked, growth equities dropped, and despite the hold in rates, the market reflected rate-driven pressure. Short-term yields price policy rate paths, whereas changes at the long end reflect expectations for long-term inflation—the market’s confidence in the Fed’s ability to control inflation showed signs of weakening.

Why did a widely expected “pause” result in a sharp increase at the long-end of the curve? The core reason lies in the different sets of indicators used on the dashboards of the market and the Fed.

The “perspective” signal behind the July decision

The Fed’s decision to “pause” was a result of macro data narrowing its policy options. The Fed’s dual mandate means its monetary policy decisions depend on the status and outlook of both inflation and employment. According to the Fed’s typical reaction function, the rationale for standing pat in July was relatively sufficient. On the inflation side, the impact of tariffs and one-off oil price shocks began to fade; on the employment side, a “frozen” pattern of low layoffs and low hiring persists, providing little endogenous overheating to support rate hikes.

The market questions whether the new chair’s words match his actions, and whether the anti-inflation resolve is firm. Walsh stressed that the Fed’s inflation target remains unchanged and that there’s no such thing as a “soft target,” insisting the Fed “won’t hesitate” when necessary. However, the removal of forward guidance and the shifting dot plot (Walsh didn’t submit one in June) signal a partial loosening of both communication and policy path, adding doubt to his hawkish rhetoric.

The three dissenting votes behind the decision also reveal a structural split between central leadership and regional Fed banks—dissent from regional presidents and agreement among governors reflects differences in macro perspective.

On one hand, regional presidents and governors have different constituencies on the Fed’s political spectrum; regional presidents are nominated by their boards of directors and approved by governors, giving them more technocratic profiles and lower political costs for dissent; Fed governors are nominated by the president and confirmed by the Senate, making them more political than technocratic.

On the other hand, their areas of focus and informational structures differ; regional Federal Reserve Banks conduct visits to local businesses, assess bank operations, and monitor the labor market—the familiar “Beige Book” arises from such needs; governors, headquartered in Washington, focus on national aggregate data, systemic financial stability, and coordination across international affairs. This difference in information granularity may be the key driver of diverging views.

This time, the three dissenting regional presidents were Minneapolis Fed’s Kashkari, Cleveland Fed’s Mester, and Dallas Fed’s Logan. Kashkari’s opposition is rooted in the idea that consecutive supply shocks may entrench inflation, requiring timely Fed action; Logan argued that current labor, consumption, and financial conditions mean that holding rates for the fifth consecutive meeting is not constraining enough; Mester believes inflation’s cumulative effect will further limit household and business activity.

What kind of dashboard will the Fed face in September?

The same data, but interpreted differently

Different perspectives determine which readings are chosen for the dashboard. Kashkari’s view raises the question: does today’s string of “one-off” shocks add up to persistent inflation? This issue specifically challenges the “look-through camp,” which advocates for excluding structural inflation and sees little sign of endogenous inflation in the US macro data.

From the look-through camp’s perspective, current price increases are mainly due to tariff and energy-sourced supply shocks—monetary policy is ineffective in addressing this kind of inflation. Moreover, oil prices have retreated from their May highs. Despite renewed tensions and proxy conflicts, the Fed lacks reason to react to energy prices that are already falling back. Therefore, for the look-through camp, further monetary policy changes within the scope of the current shock will require a longer observation window.

Those favoring tightening—the “rules-based camp”—insist the Fed should focus on aggregate data and maintain its inflation target, regardless of which sub-component is driving inflation; poorly managed inflation—persistent deviation from the target—will have severe consequences. Kashkari’s view aligns with this theory. For the rules-based camp, even if endogenous inflation signals aren’t clear, “preemptive hikes” are needed to avoid missing the window for effective intervention.

The current Fed chair is in neither faction, nor does he try to straddle them. He represents another group that interprets economic data from a productivity perspective. In this framework, AI-driven productivity gains will continue to suppress service prices and result in natural disinflation, so from this view, a “pause,” allowing the economy to do the work, is the optimal solution. Thus, from the productivity framework, rate hikes amount to “taxing” future natural disinflation, lacking necessity, and if inflation is out of control, any hiking pace should be slow and measured.

Different perspectives determine what data is on the dashboard

Various theoretical frameworks result in different preferred indicators for each faction’s dashboard. The look-through camp prefers data excluding high-frequency noise, favoring trimmed mean PCE; the rules-based camp prefers the full set of core PCE ex-food and energy; the productivity framework values unit labor costs and service price trends.

By trimmed mean PCE growth, current inflation is near target but the core measure remains noticeably off. Simultaneously, the trimmed mean PCE may be delayed. According to its compiler, the Dallas Fed, when price moves deviate from normal, the trimmed mean can lag behind the core reading. Relying solely on trimmed means is technically imperfect as a policy tool.

Dashboard building in Walsh’s reform era

Walsh’s reform group took the stage in July, comprising 15 experts across five fields: communication, balance sheet, economic data, productivity and employment, and inflation analysis frameworks. The data subgroup merits attention, led by Chetty (IRS big data and intergenerational mobility), Walmart’s McMillon (known for data-driven retail decisions), and Murphy (who studies inequality and human capital returns).

The selection of data leaders partly signals Walsh’s expectations for the dashboard. Chetty and McMillon’s strengths are well-suited to address issues of official data’s lag, revision tendencies, and coarse granularity. Private data’s diversity also offers more specificity than the SEP, especially for trends easily missed in K-shaped divergences.

If the data team achieves meaningful progress and implementation, the composition of the Fed’s policy dashboard will shift from “aggregate, lagging, low-frequency” in the past to “distributional, real-time, high-frequency.” This will greatly enhance policy predictability for the market.

However, the task force’s deadline is year-end, after which the findings may be implemented. For the rest of 2026, voting members will judge based on the current dashboard. Thus, for the remaining three policy windows this year, the ongoing tensions between factions will persist under the existing paradigm.

Greenspan’s 1996 reforms provide a precedent for a similar situation of stalemate. From late 1995 to February 1996, as the spread between the 2-year Treasury yield and the federal funds rate shifted, rate cut expectations flipped to hike expectations within months. Greenspan suppressed action on the basis of productivity. The market was slow to accept the productivity framework, with hike expectations persisting for over a year; the Fed eventually delivered a single hike, afterward long rates fell, and time was bought for the new framework to prove itself.

For Walsh, holding off in September may not immediately dissipate tightening pressures, and a lengthy “stalemate,” as seen post-1996, may accompany his reforms and implementation phase for some time. The true test of reform isn’t a single decision, but whether ongoing questions can be withstood until task force results and the new dashboard allow the data to ultimately persuade.

Scenario assessment after the September FOMC

The post-July FOMC yield curve shifts show the market’s focus on long-term risk premia, with pricing variables moving from the short-end policy rate to longer-term term premiums. The September outcome will likely be absorbed in the same way.

Cross-scenario pricing premise: rising variance due to the lack of forward guidance

A key element of Walsh’s reform was to downplay forward guidance, which previously helped smooth the tail-risk of policy paths by effectively selling the market a straddle. The central bank bore the short volatility risk for the market. With the end of forward guidance, the hedging function disappears, and variance is returned to the market.

Short-end, rising volatility presents as higher option premiums; long-end, as wider term premiums. Short-term volatility mainly affects allocation and hedge costs, while loss of control at the long end raises the ceiling for both equities and bonds.

If the hedging effect diminishes or reverses, “equities and bonds falling together” will become more frequent. Previously, monetary policy used forward guidance to steer the market’s hedging arrangements in line with macro data. Walsh’s removal of this mechanism as Fed chair has pushed up the probability of simultaneous equity and bond declines—an effect already apparent in this year’s market performance.

The 250-day rolling correlation shows that, as of Q2 this year, the traditional negative correlation between the S&P 500 and Treasury yields has turned positive—10-year correlation moving from -0.13 in 2025 to +0.29 on August 6, 2026; 2-year from -0.30 to +0.23. Over 60 days, the same-direction correlation peaked at +0.71 in early June 2023, and though it has narrowed, the current +0.53 reading is still high by recent standards.

Base case: ongoing tug-of-war forms a new “steady state”

In our base scenario, the September FOMC will again opt for a “pause”—a linear extension of the decision-making preference led by Walsh. Ongoing reforms and two-sided data pressure from jobs and inflation will keep the Fed on hold.

Under this scenario, the market will continue to adjust bond prices based on incoming information, to some extent “substituting” for Fed tightening. The steepening pressure at the long end of Treasuries will persist, with widening term premiums meaning curve strategies will outperform directional ones.

On equities, long-duration assets will come under pressure from higher forward discount rates, so growth stocks will likely underperform short-duration assets with more certain cash flow such as banks, energy, upstream resources, and some less cyclical industrials. For sectors akin to bonds with high leverage—utilities, REITs, etc.—their long-end rates sensitivity could exceed that of growth stocks, reducing their relative allocation value.

As for precious and industrial metals, our special report “Gold and Copper: Resonance, but Who Wins on Allocation?” noted that gold acts like a call option during rising monetary policy uncertainty; with higher variance, gold’s allocation value may increase, while silver, copper, and other more industrial metals could enter a choppy period amid slower growth expectations.

Tightening scenario: confidence rebuilt or compromise tightening

In this scenario, if in September Walsh delivers on his “anti-inflation resolve” with a rate hike, short-term yields rise, term premium narrows, and the curve flattens. For equities, the short-rate hike will inevitably hit valuations, but the subsequent benefit comes from a drop in long-term rates and contraction in uncertainty premium—long-duration assets gain greater rebound potential.

Precious and industrial metals may behave contrary to the base case—monetary policy uncertainty narrows, policy rates suppress growth expectations, which hurts gold and industrial metals respectively; both sides could come under synchronized pressure.

Another “tightening” scenario is not about the direction of decision but how the market interprets it. If August PCE disappoints, or extra economic slowing/fiscal stress emerges, a hike may be seen as “compromise” forced by inadequate data or political pressure. Substantive rate rises will suppress equity valuations, while long-term inflation expectations may remain unanchored.

In this case, both short- and long-term yields may climb—raising the odds of simultaneous equity and bond losses; policy credibility fails to recover and could worsen, and precious metals might rally instead of falling.

Easing scenario: data-driven, justified easing

If inflation continues to cool from May’s high and the jobs environment materially worsens, the Fed may turn to rate cuts. For the curve, the short end drops, but term premium could widen due to deficit and supply pressure.

Data-driven easing primarily affects the short-end for valuations. Lower discount rates help with limited valuation recovery, but persistent long-end yields provide an upper cap; meanwhile, letting inflation run might trigger future earnings downgrades, hitting the numerator. Regarding precious metals, an environment of falling real rates would offer some support, and since fundamental easing stems from genuine recession, increased risk aversion reinforces this support.

Volatility may rise rather than fall. Even if a cut comes in September, it would be a passive response to current data ahead of new task force results and a new proactive policy framework. Passive responses never provide the market with a clear path, so divergence on forward rates will remain.

Asset matrix under three scenarios

An open question: what policy tool is missing from Walsh’s toolkit?

Among the three data camps, the look-through and rules-based teams have tools in the Fed’s domain; only the productivity framework relies on forces outside monetary policy. For the productivity framework to work, it's not enough for the Fed to control the short end; it also needs a tool willing to give up today’s risk premium to accommodate future deflation expectations.

Post Walsh’s reforms, the Fed temporarily lacks effective long-end policy tools. Historically, the Fed has had three main ways to steer the long end: 1) buying assets to compress term premium; 2) smoothing the short end with forward guidance to flatten the curve; 3) providing dot plot and SEP for explicit paths. Walsh’s reforms—balance sheet reduction, removal of forward guidance, and trimming the dot plot—have weakened all three.

Currently, tools for managing the long end are in the Treasury’s hands, not the Fed’s. The maturity structure of Treasury issuance, the scale and pace of buybacks, Treasury General Account management, and dollar liquidity cross-border arrangements are all term premium management tools held by the Treasury Department. Issuance structure determines duration, buybacks adjust market liquidity, the TGA manages reserve volatility, and cross-border liquidity arrangements influence foreign demand—together covering most long-end pricing variables.

Looking ahead, whether the Fed and Treasury can form a division of labor—with clear boundaries to Fed independence—may be key to the delivery of Walsh’s productivity framework.