The US Federal Reserve kept interest rates unchanged on Wednesday, choosing to wait for clearer signs on inflation as renewed fighting linked to Iran keeps pressure on oil prices and clouds the outlook for the world’s largest economy. The Federal Open Market Committee held the benchmark rate at at 3.5% to 3.75%, in line with expectations. The decision came after a two-day meeting and was followed by a press conference by Fed Chair Kevin Warsh, his second policy meeting since taking charge of the central bank.
The decision comes at a difficult moment for the US central bank. Inflation has cooled from its earlier highs but remains above the Fed’s long-term 2% target. Consumer prices rose 3.5% year-on-year last month, and investors are worried that swings in oil prices linked to the Iran conflict could push inflation higher again.
The Fed said economic activity is "expanding at a solid pace," noting, as it did in June, that job gains "have kept pace with the workforce, and the unemployment rate has changed little." Warsh said in a press conference following the FOMC announcement that "we've 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. This Fed will not waver" on getting inflation back to the 2% target.
While he declined to say what's next for monetary policy, Warsh said "I want to stress, of course, that decisions by this committee matter a great deal, and where necessary and appropriate, we will not hesitate to act."
The decision drew dissents from three of the 12 members of the policy-setting Federal Open Market Committee who "preferred" a quarter-percentage-point hike at this meeting.
Fed chooses patience
The Fed has been under pressure from two sides. Markets have been watching for signs of another rate hike because inflation is still above target. At the same time, President Donald Trump has repeatedly pressed the central bank to lower borrowing costs.
Warsh has said the Fed remains focused on price stability. With unemployment steady at around 4.2%, policymakers have made clear that inflation remains the bigger concern.
At the Fed’s previous meeting, half of policymakers said they expected at least one rate hike before the end of the year. That kept investors alert to the possibility of a move this week. Before the decision, markets were pricing in a more than 30% chance of an immediate rate increase, according to CME’s FedWatch tool.
The Fed, however, chose to hold for now, while keeping the door open for action later.
Matthew Ryan, Head of Market Strategy at Ebury, said the recent inflation reports have come in soft, while the labour market is in a ‘goldilocks’ state that provides no real urgency to hike.
Iran risk keeps inflation in focus
The renewed fighting around Iran has added to the Fed’s challenge because of its impact on oil prices. Energy prices can quickly feed into transport costs, consumer inflation and inflation expectations. The pause in military strikes over the weekend had brought some relief to oil prices, while recent US data did not justify a more aggressive move from the Fed.
Politics adds pressure
The meeting also took place under heavy political pressure. Trump has repeatedly criticised the Fed for not cutting rates. He had put pressure on Warsh’s predecessor Jerome Powell and attempted to remove Fed Governor Lisa Cook, though the Supreme Court blocked the move.
Warsh has insisted that he is not Trump's puppet. On Monday, Trump appeared to give him some room, saying Warsh had a board and needed the consent of others. The Fed’s challenge now is to preserve its inflation-fighting credibility while avoiding an unnecessary shock to the economy.
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