The Federal Reserve’s July 29 decision to hold its benchmark rate at 3.50%–3.75% is still working its way through markets, and Monday’s ISM Manufacturing PMI report gave investors their first hard data point to test the central bank’s internal split. For payments and lending, the combination points to a stretch of elevated borrowing costs running at least through Q3.
A Divided Fed
The Federal Open Market Committee (FOMC) voted 9-to-3 to leave rates unchanged, marking the fifth straight meeting without a move. Three regional Fed presidents, Cleveland’s Beth Hammack, Minneapolis’s Neel Kashkari, and Dallas’s Lorie Logan, dissented in favor of a quarter-point hike, the first time since September 2016 that three policymakers have broken ranks in the same direction. The Fed cited elevated inflation, pointing partly to supply shocks in sectors including energy.
Chair Kevin Warsh, in his second meeting at the helm, described the internal debate as a “family fight.” Fed funds futures pushed September rate-hike odds above 60% in the decision’s immediate aftermath, up sharply from where they stood before the meeting, according to CNBC’s coverage of the vote.
PMI Confirms the Hawks’ Case
Monday’s data gave the hawkish camp fresh ammunition. The Institute for Supply Management’s Manufacturing PMI registered 55.6% in July, up 2.3 percentage points from June’s 53.3% and well above consensus estimates near 54.0%. It’s the index’s highest reading since May 2022, according to ISM’s report.
Most key measures of U.S. manufacturing improved in July: new orders, production, and hiring all increased, while price pressures remained high but eased slightly, giving the Federal Reserve a small sign that inflation may be cooling.
Four of the five subindexes that feed the composite accelerated. New Orders rose to 56.7%, Production jumped 6.3 points to 58.5%, and Employment moved into expansion territory for the first time in 33 months at 52.8%. The Prices Index, while still elevated at 71.1%, eased 1.9 points from June — a rare bright spot for a Fed weighing whether cost pressures are peaking.
ISM’s Susan Spence noted that the reading corresponds to roughly 2.8% annualized GDP growth, per the report’s historical relationship between the PMI and output.
Why It Matters for Payments and Lending
A three-way hawkish dissent paired with an accelerating manufacturing sector strengthens the case for a September hike rather than undermining it. For payments companies, that combination points toward interchange and card-not-present financing costs staying elevated longer than markets priced in earlier this summer. Merchant financing, BNPL underwriting, and cross-border settlement costs, basically all segments sensitive to short-term rate expectations, are likely to reflect that repricing before the Fed’s next meeting.
For banks and borrowers, this means loans with variable interest rates could become more expensive, and if the Fed raises rates again in September, refinancing loans at lower rates will become even harder.
