According to a recent report from The Associated Press, the Federal Reserve left its key interest rate unchanged Wednesday despite persistently high inflation and a spike in energy prices caused by the Iran war.
The Fed’s rate-setting committee reached the 9-3 decision after two days of deliberations, marking the fifth straight meeting at which the benchmark rate was kept at around 3.6%.
Dissenting in favor of a quarter-point interest rate hike 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.
In reaction to the dissents, Fed Chair Kevin Warsh told reporters at a press conference following the Fed’s announcement, “I asked for a good family fight and I got one.”
Inflation has been stuck above the central bank’s 2% target for more than five years. The Iran war has generated uncertainty over the economic outlook and has driven energy prices higher, intensifying inflationary pressure and creating a quandary for Fed policymakers. Hammack, Kashkari and Logan had previously called for or signaled that they would be open to raising rates to combat high prices.
Warsh, presiding over his second meeting of the central bank’s rate-setting committee, has declared that he has “no tolerance’’ for elevated inflation. He was appointed by President Donald Trump, who has put intense pressure on the Fed to cut rates instead of raising them.
Warsh said in the time between the two latest Fed meetings, the market has reacted to real economic data and the reduction in forward guidance from the central may have played a role in that. The market is “learning to play the ball and not the referee,” Warsh said. The new Fed chair has voiced criticism that his predecessors at the Fed made the markets too dependent on signals from the Fed on the direction of interest rates.
While traders on Wall Street saw a 33% chance the Fed would hike rates Wednesday to tamp down inflation, most expected policymakers to hold off, reluctant to risk disrupting financial markets. But 76% foresee a rate hike in September. A month ago, only 59% of traders expected a September rate increase, according to data from CME.
Fed officials likely want to see more economic data before changing the rate. On Thursday, the Commerce Department delivers the first look at April-June economic growth and it will also publish the Fed’s preferred inflation measure — the personal consumption expenditures (PCE) price index — for June.
