Federal Reserve Holds Interest Rates Amid Member Dissent

The Federal Reserve kept interest rates unchanged, a decision that may intensify questions about how Kevin Warsh, the new central bank chief, will fulfill his commitment to bring inflation back to the targeted level of two percent. The widely expected decision to maintain the benchmark interest rate in the 3.50% to 3.75% range drew opposition from three of the 12 members of the Federal Open Market Committee responsible for setting monetary policy, as these members favored raising rates by a quarter percentage point at this meeting. The same three members, who are presidents of the Federal Reserve branches in Cleveland, Dallas, and Minneapolis, also dissented at the previous meeting chaired by Jerome Powell as central bank chief in late April, when they called for removing the implicit hint of future rate cuts. Warsh, who assumed the Fed chairmanship in May, stated that he “absolutely does not tolerate” inflation that has remained above the central bank’s target for more than five years. Inflation had been accelerating until last month, driven by global increases in fuel and food prices due to the war in the Middle East, as well as heightened demand fueled by investment in data centers and other spending related to artificial intelligence. A brief monetary policy statement issued by the Fed following the conclusion of its two-day meeting said, “Inflation remains elevated relative to the Committee’s 2% objective.” The statement repeated verbatim all the economic assessments contained in the June 17 statement. The central bank noted that economic activity “is expanding at a strong pace,” adding, as it did in June, that job growth “has kept pace with labor force growth, and the unemployment rate has remained largely unchanged.” By keeping the main interest rate within the range it has held since December, Fed policymakers are adopting the view that current borrowing costs are providing sufficient economic slowdown to curb any inflation that is not expected to dissipate on its own. Warsh made no significant remarks about the mix of risks or interest rate expectations, although he expressed his belief that rising productivity, supported by AI technologies, would allow the economy to grow at a faster pace without causing inflation to rise. Financial markets had priced in roughly a one-third probability of a rate hike ahead of this week’s meeting. With no such move taken this week, markets now fully expect an increase in September. By then, Fed policymakers will have additional data covering two new monthly readings on inflation and the labor market, giving them a clearer picture of whether the slowdown in price pressures observed last month has continued.