The Federal Reserve held its benchmark interest rate steady on Wednesday, but three Fed presidents dissented, highlighting the pressure building on the central bank to confront stubbornly elevated inflation.
The Federal Open Market Committee voted 9-3 to maintain the federal funds target rate in a range between 3.5% and 3.75%. All three dissenters — regional Fed Presidents Beth Hammack, Neel Kashkari and Lorie Logan — called for a quarter-point increase. It was the fifth meeting in a row at which the benchmark rate was unchanged, and the first since 2016 at which three FOMC members dissented in the same direction.
The statement released by the FOMC at the conclusion of its two-day meeting was little changed from the previous one. The notably brief statement said the economy continues to expand “at a solid pace,” despite “elevated uncertainty” related to the ongoing war with Iran. Inflation remains above the Fed’s 2% target rate, and the committee repeated its vow to “deliver price stability.”
The Fed’s decision matched expectations, though there was considerable speculation in the run-up to the announcement that the central bank might surprise the market with a rate hike spurred by worries about inflation
Warsh says rates are higher: In his second post-FOMC appearance, Fed Chair Kevin Warsh repeated his pledge to “steer clear” of providing forward guidance as part of his effort to shift the focus from central bank expectations to the “real-time” behavior of market participants. He also sought to assure market participants that, despite not raising rates, the Fed is dedicated to bringing inflation down to the 2% target, even if it takes time to achieve that goal.
“Let me reiterate: There is no soft inflation target,” Warsh said. “There is no soft implicit target, not on this committee’s watch.”
Warsh said that a key development over the last six weeks has been an increase in interest rates across the yield curve, driven by market participants rather than Fed policy. Warsh added that the reduction in forward guidance from the Fed may have played a role in the broad increase in market-based rates. He suggested that, by pushing rates higher, the bond market is doing the work of fighting inflation for now.
What analysts are saying: Investors on Wall Street seemed to take the Fed’s decision lightly at first, but after Warsh began to speak, stocks sold off sharply and long-term rates shot higher, even as short-term rates fell. The 30-year Treasury bond yield jumped 10.5 basis points to 5.2% and briefly touched the highest level since 2007. The Dow Jones Industrial Average fell more than 2% on the day, dropping 1,152 points to close at 51,594, while the S&P fell 1.5%, down 112 points to close at 7,316.
Neil Dutta of Renaissance Macro expressed concern that Warsh didn’t do enough to establish his credibility as an inflation fighter. “If you don’t want to talk, you need to put up or shut up. He didn’t. Hence the move in the [30-year Treasury],” Dutta said, per Bloomberg.
The sentiment appeared widespread. Dario Perkins of forecasting firm TS Lombard criticized Warsh’s comments as “all spin, no delivery,” and suggested that he stop doing press conferences. “In refusing to offer forward guidance on policy — confirmed again today — Kevin Warsh fancies himself as the Diego Maradona of central banking,” Perkins said. “Our bet is that things will get Messi.”
More of the same? Michael Reynolds, vice president of investment strategy at Glenmede, noted that, at least so far, there has been little difference between Warsh and his predecessor, Jerome Powell. “There’s a good amount of continuity between the two chairs,” he told CNN.
This continuity has come as a surprise to some observers, given that Warsh was appointed by President Trump, who has repeatedly called for lower interest rates — a demand that Powell repeatedly ignored.
If he was feeling any regret for his choice of Warsh, Trump showed no signs of it Wednesday, instead blaming the FOMC committee for holding rates steady. “Kevin’s got a board. He’s fantastic. He’s a brilliant guy. Smart,” Trump told reporters at the White House. “I know he’d love to see lower interest rates, but he’s got a board and it’s a political board and they want to keep rates up.”
Rate hikes could be coming: Trump’s hope for lower rates seems unlikely to be fulfilled any time soon. “Financial markets are pricing in a 100% chance of a rate hike in September,” said Diane Swonk, chief economist at KPMG. “The core of hawks within the Fed has grown and hardened in its resolve to raise rates. The timing is less than ideal for a new Fed chair, but this is what an independent central bank is all about. We still expect two rate hikes in the latter part of the year.”