The Federal Reserve left interest rates unchanged and delivered its clearest signal yet that upside risks to inflation now outweigh downside risks to employment in Kevin Warsh’s second meeting as chair—a hawkish bias underscored by three votes in favour of an immediate hike. After two days of discussion, the Federal Open Market Committee voted 9–3 to maintain the target range for the federal funds rate between 3.50 and 3.75% for a fifth consecutive meeting. Lorie Logan, Beth Hammack, and Neel Kashkari, presidents of the Dallas, Cleveland, and Minneapolis Federal Reserve Banks respectively, cast the dissenting votes after making the case for tightening in recent speeches and media appearances.
In a brief statement setting out the decision, the committee described the economy as “expanding at a solid pace despite elevated uncertainty that owes, in part, to the conflict in the Middle East”, observed that productivity growth and capital investment are “strong”, and pointed to continued stability in the labour market. Inflation “remains elevated”, they said, in part owing to supply shocks impacting a range sectors including energy.
No new quarterly economic or interest rate projections were provided.
The decision comes after the headline consumer price index declined in June from the previous month, while a measure excluding food and energy categories—the so-called core index—flatlined for the first time in more than five years. Job creation and real wage gains cooled in the same month, easing concerns about demand-led inflation. But a renewed outbreak in hostilities between the US and Iran has seen oil prices climb once again, with both major global benchmarks up 47% this year.
Uncertainty was unusually high ahead of the decision. This morning, markets were pointing to a roughly one-in-three chance of a rate hike—far closer to a coin toss than has been typical of Fed meetings in the past.
The dollar is slipping against all of its major rivals and Treasury yields are edging down across the policy-sensitive end of the curve as investors incrementally lower expectations for a hike at the central bank’s September meeting. Chair Kevin Warsh is unlikely to provide clear guidance on the rate trajectory ahead during the post-decision press conference, preferring instead to let incoming data speak for itself.
Assumptions could accordingly shift dramatically in the coming weeks, with several key consumer price and employment releases due and conditions in financial markets in flux as investors reassess the geopolitical backdrop and the technology boom. Evidence of further easing in inflation pressures might revive the case for a more prolonged hold, while the opposite would embolden today’s dissenters, reinforce tightening expectations, and extend the dollar’s gains.