U.S. Treasury yields surged Friday after oil prices climbed and three Federal Reserve officials publicly broke with the central bank's 9-3 decision to hold rates steady, calling instead for immediate action to combat inflation that's persisted above the Fed's 2% target for more than five years. The benchmark 10-year Treasury note rose nearly 5 basis points to 4.71%, while the 2-year note climbed more than 4 basis points to 4.273%. The 30-year bond yield gained more than 4 basis points to 5.249%.
The Dissenters Speak
Cleveland Fed President Beth Hammock didn't mince words. "In my view, now is the time for the [Federal Open Market Committee] to act to speed the return of PCE inflation to our 2 percent objective and deliver on our commitment to price stability for the American people," she said in a statement. "The longer that high inflation persists, the more challenging and costly it can be to bring it back down." Minneapolis Fed President Neel Kashkari warned that small hikes now can prevent larger, more disruptive moves later. "In my view, a potential series of small policy moves would be better than waiting and eventually concluding that even bolder actions were necessary," Kashkari said.
Dallas Fed President Lorie Logan joined Hammock and Kashkari in dissenting from Wednesday's rate decision, preferring instead a quarter percentage point increase. "Even after accounting for productivity gains and temporary supply shocks, inflation appears to be trending toward the mid-2's, not all the way to 2 percent, and the risks are to the upside," Logan said Friday. She noted that researchers had found "that a change in the mix of price increases and decreases is causing the trimmed mean to drop too many increases right now. This effect likely makes the trimmed mean lower than the true inflation trend."
Energy Prices Reignite Inflation Concerns
Oil prices rose after Iran said it attacked two tankers transiting the Strait of Hormuz. West Texas Intermediate futures rose 2.2% to $85.41 per barrel, and Brent crude futures, the international benchmark, gained 1.5% to $90.36. The move in energy prices also hurt sentiment toward bonds, pushing yields higher across the curve.
Thursday's Commerce Department data showed the all-items personal consumption expenditures price index fell 0.1% for the month, largely on a sharp decline in fuel costs, while the core level that excludes food and energy gained 0.1%. On an annual basis, the two gauges rose 3.7% and 3.3%, respectively. Economists polled by Dow Jones had expected 0.2% monthly growth and 3.3% annually for core PCE. The core PCE reading remained above the Fed's target.
Growth Slows Below Expectations
GDP data showed U.S. growth slowing to 1.5% in the second quarter, missing the Dow Jones consensus estimate of 1.8%. An advance estimate released July 30 recorded the 1.5% rate of growth, slower than expected but still better than Japan's and the European Union's forecast rates of growth.
Another inflation gauge pointed lower. The Dallas Fed's trimmed mean measure put the one-month annualized rate for June at 1.4%, down 1.3 percentage points from May and at its lowest level since November 2020. The 12-month rate fell to 2.2%, down 0.2 percentage point from a month earlier and at a bottom not seen since July 2021. The Dallas Fed measure excludes 24% of the lower-end price readings and 31% at the high end to calculate a midpoint. The Cleveland Fed has a 16% trimmed mean that includes price changes below the 92nd percentile and above the 8th percentile; for June, that trimmed CPI was 2.63%, on an unrounded basis, the lowest since May 2021.
Citigroup economist Andrew Hollenhorst said in a note that trimmed mean data "should also now fall closer to target-consistent rates." He added that "the fact that underlying inflation is still slowing toward target – as indicated by a broad set of indicators – is now even more relevant given Chair Warsh's suggestion that he would analyze inflationary pressure by looking across a broad range of metrics." Hollenhorst said, "We expect markets to price-out rate hikes in coming months on inflation data, and price-in cuts if the unemployment rate rises as we project."
Warsh's Broader Inflation Framework
Fed officials are quick to stress that they don't focus on one month of any data point, but the trend in the trimmed mean could get more attention, particularly in light of Chairman Kevin Warsh's intention to reexamine how the central bank views inflation and what data points it employs. Warsh said, "Not one of my FOMC colleagues is under any illusion. We have begun a new chapter, and we understand that the five-plus years of inflation above target cannot be cured in nine weeks — or by a single month of modest price decreases."
The University of Michigan reported Friday that consumer sentiment perked up a bit in July as inflation fears abated. The one-year inflation view dipped to 4.2%, down 0.4 percentage point from May and the lowest since March, while the five-year outlook was unchanged at 3.3%.
Strong Labor Market Ahead
Next week, investors await key jobs data, including the nonfarm payrolls report for July on Friday and the JOLTs job openings report for June on Tuesday. The broader market focus also includes upcoming employment and sentiment data. Unemployment remains low, and in July, jobless claims were at the lowest level since Neil Armstrong walked on the moon and The Beatles released "Abbey Road." Salaries are forecast to grow at a healthy 3.5% on average in 2026, the same pace as last year, and the typical worker is at least keeping up with inflation, compared with 2022 when prices rose 8% and incomes grew 5.3%.
The poverty rate has dropped 16.5% since 2016, from roughly 1 in 8 Americans 10 years ago to about 1 in 10 now, according to the most recent Census data available. The United States minted about 1,200 new millionaires every day in 2025, meaning more than 440,000 Americans saw their net worth jump into seven figures in one year. The S&P 500 has gained nearly 17% since July 2025, reflecting strong profits across a variety of sectors and added wealth for the more than 60% of Americans who own stocks. Almost 500,000 new businesses have been launched each month since January 2024, citing The Economist.
The overall economy continues to grow at a solid pace despite uncertainty that President Trump's tariffs and the war with Iran have injected into the marketplace. The tariffs and the war have kept inflation higher than it should be, put a strain on family budgets, led to elevated interest rates on auto and home loans, and jacked up energy costs. The U.S. economy is healthy and growing, but would be even stronger if the president got out of the way.
Why This Matters:
The Federal Reserve's credibility hinges on its ability to deliver price stability, and three dissenting officials signal growing impatience with inflation that's lingered above target for more than five years. While some alternative measures show improvement, core PCE inflation at 3.3% annually remains well above the Fed's 2% objective, imposing real costs on American households through higher borrowing rates and reduced purchasing power. The tension between economic growth at 1.5% and persistent inflation creates a delicate balancing act: act too aggressively and risk choking off expansion, wait too long and allow inflation expectations to become entrenched. Iran's attacks on oil tankers demonstrate how geopolitical instability can quickly reignite price pressures, complicating the Fed's path forward. Markets will closely watch next week's employment data for signs that the labor market remains tight enough to support continued wage growth without fueling further inflation. The stakes are high for families, businesses planning investments, and policymakers navigating an economy that's fundamentally strong but burdened by policy uncertainty.