The U.S. Federal Reserve (Fed) on the 29th (local time) kept its benchmark interest rate at the current level, extending its streak of five straight holds. But three dissenting votes within the Fed called for a rate hike. In particular, Fed Chair Kevin Warsh showed a strong resolve to achieve the 2% inflation target, dismissing investors' expectations for rate cuts. Although the Fed held rates, the dominant view is that it was effectively a "hawkish hold" favoring currency tightening.
The Fed said on the 29th that it concluded a two-day Federal Open Market Committee meeting and decided to keep the benchmark rate at 3.50% to 3.75% annually. The decision passed with 9 votes in favor and 3 against among the 12 Commissioners. Beth Hammack, president of the Federal Reserve Bank of Cleveland, Neel Kashkari, president of the Federal Reserve Bank of Minneapolis, and Lorie Logan, president of the Federal Reserve Bank of Dallas, argued for a 0.25-percentage-point rate hike and cast dissenting votes. This stands in sharp contrast to the unanimous decision to hold rates at the regular meeting in June.
Warsh expressed his resolve to curb inflation at a news conference. He said, "Over the past five years, the persistence of high inflation has left some households, corporations, and market experts with the mistaken impression that the Fed's implicit inflation target is higher than 2%," adding, "The inflation target has not been relaxed." He went on to emphasize, "There is only one goal at the Fed: 2%."
Warsh also took a firm stance on the future direction of currency policy. The chair said, "Fed decisions are very important," and "If deemed necessary and appropriate, the Fed will not hesitate to act." At the same time, he said, "If inflation remains elevated throughout, rate (increases) could also be part of the solution," not ruling out the possibility of hikes. Experts said Warsh is continuing to offer few clues to the market about the future path of rates. The approach is seen as guiding investors to absorb policy uncertainty on their own.
Hawkish Commissioners within the Fed are concerned that inflation fears are resurfacing as geopolitical crises like the Iran war intensify. Near the Strait of Hormuz, military exchanges between the United States and Iran have resumed, increasing uncertainty in passage. International oil prices are surging accordingly. U.S. President Donald Trump warned in a Fox News interview that "we will strike hard against Iran's military provocations." The rise in oil prices driven by geopolitical anxiety is adding inflationary pressure and spreading across the U.S. economy. In a statement, the Fed said, "Price increases from supply shocks are appearing in some institutional sectors, including energy," and assessed that "inflation still exceeds the 2% target."
Still, the Fed showed confidence in the fundamentals of the U.S. economy. In its decision, the Fed said, "Despite heightened uncertainty due to conflicts in the Middle East, economic activity in the United States is expanding at a solid pace." It added, "Productivity is improving, capital investment is also strong, the number of jobs is increasing in line with the labor force, and the unemployment rate has hardly changed." This is interpreted to mean there is little need to cut rates immediately to stimulate the economy, given that growth remains robust.
Markets and experts view the hawkish hold as leaving the door wide open for a rate hike at the September meeting. Kathy Bostjancic, chief economist at Nationwide, said, "The numerous dissenting votes show that policymakers are becoming increasingly hawkish." Omar Sharif, head of Inflation Insights, said, "At this stage, unless labor market data collapse or the core inflation rate approaches an annualized 2%, we should expect the Fed to raise rates by 0.25 percentage point at the September meeting."
According to the Chicago Mercantile Exchange FedWatch, the interest rate futures market estimated immediately after the announcement that the probability of a September rate hike was about 72%.