Inflation is still higher than the Federal Reserve wants it to be, but the central bank announced Wednesday that it is holding its benchmark interest rate steady in a range between 3.75% and 4% nonetheless.
In a brief policy statement released at the conclusion of a meeting of the rate-setting Federal Open Market Committee, the bank said inflation “remains elevated.” At the same time, the economic data indicate healthy conditions overall.
“Economic activity is expanding at a strong pace,” the Fed said. “While uncertainty remains elevated owing, in part, to geopolitical developments, domestic spending has been resilient. Productivity growth is strong, and capital investment is robust. Job gains have kept pace with the workforce, and the unemployment rate has changed little.”
There were two dissenting votes among the 12 cast, one by Cleveland Fed President Beth Hammack and one by Governor Lisa Cook, both of whom wanted the FOMC to raise its benchmark rate by a quarter of a point.
Warsh announces changes: In a post-meeting press conference, Fed Chair Kevin Warsh generally sidestepped questions about why the Fed was holding rates steady rather than raising them, given the fact that inflation remains well above the central bank’s 2% target. He did say, however, that he’s not worried that strong economic growth is producing excessive inflationary pressure, in part because he thinks productivity is growing, making it possible to grow faster without inflation.
“Is the economy running too hot? Is the economy too strong?” he said. “That isn’t the judgment of most of my colleagues.”
Warsh also announced that the FOMC plans to change its meeting schedule, reducing the number of rate-setting meetings from eight to six per year. In 2027, one of the eight meetings will focus solely on long-term economic trends and “broad monetary policy strategy” while dispensing with a rate vote. In 2028, two of the eight meetings will have such a long-term focus.
What the analysts are saying: While the decision to hold rates steady was widely anticipated, some analysts are wondering why the Fed is failing to take additional steps to rein in inflation, given the pace of economic growth and the failure to reduce upward pressure on prices.
“I think the Fed should be raising interest rates, based upon the two-year Treasury being at 4.75%,” prominent bond investor Jeffrey Gundlach told CNBC. “What are you waiting for? ... We’re headed to 4% handle headline CPI. The commodity index is rising in a bull market, and I don’t understand why the Fed is so reluctant to move.”
William English, a former senior Fed economist, said he doesn’t think the central bank needs to move quickly. “I think they probably have to raise rates a bit further, but I don’t think they have to do it right away,” English told The Wall Street Journal.
Another former Fed economist disagreed. “In terms of risk management, why the heck do you not hike in October if you have a 4% inflation print?” Riccardo Trezzi of the research firm Underlying Inflation told The Journal. “It just sounds too dovish, honestly.”
The bond market responded to the Fed’s decision by pushing longer-term yields modestly higher, even as short-term yields fell — an indication that traders are raising their long-term inflation expectations. “That to me is literally the market saying that you talk tough on inflation but you are not delivering on it,” said George Goncalves, head of U.S. macro strategy at MUFG Securities, per The New York Times.
Many analysts remain convinced that more rate hikes are all but inevitable. “In our estimation, the Fed will need to hike at least two more times and possibly more over the next five months, resulting in a tightening of financial conditions, an abatement of inflation and a slowing economy,” RSM Chief Economist Joseph Brusuelas said in a research note. “While Fed Chair Kevin Warsh dislikes forward guidance, the two dissents in the FOMC vote, from Fed Governor Lisa Cook and Cleveland Fed Beth Hammack, tell us that there is a growing faction on the FOMC—we think a majority—that is ready to hike rates in December and again in March to put inflation on the road back to price stability.”