The Federal Reserve held its key interest rate steady on Wednesday despite persistently high inflation and an Iran war-driven surge in energy prices.
The US Federal Reserve on Wednesday held interest rates in the world's largest economy steady, with three of the 12 voting policymakers dissenting from the majority decision and calling for a quarter-percentage-point rate hike.
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The Fed held its target range at 3.50-3.75% for the fifth straight meeting, repeating its previous assessment of inflation, unemployment and economic activity. It described inflation as “elevated”.
Economists had largely expected the Fed to leave rates unchanged, although financial markets continue to see a significant chance of an increase in September.
Richard Carter, head of fixed interest research at Quilter Cheviot, said: “While there had been speculation that the Federal Reserve would take the nuclear option and in fact raise interest rates at this latest meeting, it continues to leave the option in its back pocket just in case it gets spooked about the path for inflation and has to break the glass.”
Dissenting in favour of a quarter-point rate increase were Beth Hammack, president of the Federal Reserve Bank of Cleveland; Neel Kashkari, president of the Minneapolis Fed; and Lorie Logan, president of the Dallas Fed.
Responding to the dissents, Fed Chair Kevin Warsh told reporters at a press conference following the decision: “I asked for a good family fight, and I got one.”
Warsh said the US economy was showing “impressive resilience, even with recent shocks”.
“The trends are positive and reveal solid growth,” he said, adding that the economy was doing “pretty well” in relation to the central bank’s goal of full employment.
However, he added: “Inflation remains elevated relative to the committee’s 2% goal.”
Inflation has remained above the central bank’s 2% target for more than five years. The Iran war has increased uncertainty surrounding the economic outlook and driven energy prices higher, intensifying inflationary pressures and complicating the Fed’s decision-making. Hammack, Kashkari and Logan had previously called for higher rates or indicated that they were open to an increase to combat high prices.
Annual consumer-price inflation eased to 3.5% last month, but could accelerate again after renewed fighting in the Middle East sent oil prices soaring.
Carter said, “Today’s statement did talk about how the Fed ‘will deliver price stability’. June’s better-than-expected inflation readings mean the Fed has the breathing room to take such an approach this time, but as we have seen in the Middle East, things can change quickly, and price pressures can return almost as soon as they have dissipated.”
Warsh vowed that the central bank would restore price stability but said there was no “magic wand” that could quickly return inflation to its target.
“We are on the job. We will deliver,” Warsh said when asked about bringing inflation back to the Fed’s 2% target. “But the suggestion that we’re going to be able to do it with our magic wands is one I want to disabuse you and everyone else of.”
Financial markets still see a significant probability of a September rate increase, although policymakers may want to examine further economic data before acting. On Thursday, the Commerce Department will publish its initial estimate of US economic growth from April to June, alongside the Fed’s preferred measure of inflation — the personal consumption expenditures price index — for June.
