By July 2025 the Federal Reserve confronted the most treacherous phase of post-pandemic
disinflation—“the final mile” in which the last half-percentage-point of inflation proves harder
to expunge than the first four. Headline PCE had fallen from 7 % in mid-2022 to 2.5 %, yet
core services inflation, amplified by tariff-driven cost-push shocks and still-elevated wage
growth, refused to converge to the 2% target. Meanwhile, payroll gains had slowed to a crawl
(73 k in July), the unemployment rate had drifted up to 4.1%, and financial markets were
pricing two 25 bp cuts before year-end. This paper reconstructs the FOMC’s July 29-30
deliberations—held against a backdrop of White House pressure, a flattening yield curve and
an ongoing framework review—to show how the Committee balanced the competing risks of
under-tightening (un-anchoring expectations) and over-tightening (precipitating a recession).

Using the newly released minutes, high-frequency market data and a calibrated New-
Keynesian model, we argue that the decision to hold the federal-funds target at 4.25-4.50 %

can be interpreted as a state-contingent “flexible anchoring” strategy: keep policy moderately
restrictive today while signalling that even a modest deterioration in labor-market momentum
would justify insurance cuts as early as September. Counterfactual simulations indicate that
the chosen path shaved 15 bp off the term premium, reduced the probability of a 2026 recession
by one-third relative to a hawkish baseline, and kept 5y5y inflation expectations anchored at
2.05 %. The episode illustrates how a transparently data-dependent reaction function can
substitute for explicit forward guidance when the economy is buffeted by supply-side shocks
whose persistence is unknown.