The Federal Reserve left its benchmark lending rate unchanged at 3.5% to 3.75% for a fifth consecutive meeting Wednesday, as Chair Kevin Warsh navigated conflicting signals from cooling inflation and resurgent energy prices tied to the Iran conflict.
The Federal Reserve held its benchmark lending rate at 3.5% to 3.75% for a fifth straight meeting Wednesday, opting against a hike even as renewed US-Iran hostilities pushed oil above $84 a barrel and inflation remained above the 2% target.
"While we know Chairman Kevin Warsh is not a fan of forward guidance — or showing his hand with respect to his opinion on the direction of rates — I think collectively, the written statement and news conference will be used to signal what's coming next," said Mark Hamrick, senior economic analyst at Bankrate.
The decision came as stocks sold off sharply, with the Dow dropping as much as 750 points and the S&P 500 falling 0.75%, while the 10-year Treasury yield climbed to 4.65%. Oil prices surged more than 6% after President Donald Trump vowed to hit Iran "hard" following an attempted attack on US forces, pushing Brent crude above $89 a barrel and West Texas Intermediate to about $84.
The hold leaves the Fed in a holding pattern as Warsh's five task forces study how the central bank handles inflation, jobs data and communications — with recommendations not expected until year-end. Markets are pricing in two rate hikes by December, according to the CME FedWatch Tool, which would effectively undo two of the three cuts delivered late last year under former Chair Jerome Powell.
The decision was the second under Warsh, who took office in May after being nominated by Trump. Unlike his predecessor, who faced relentless White House pressure to lower rates, Warsh has so far avoided public criticism from the president. Trump called Warsh "fantastic" on Monday while accusing other Fed board members of having "bad intentions."
White House adviser Kevin Hassett expressed confidence in Warsh less than an hour before the decision, saying the administration expects the chair to "do the right thing" and projecting downward pressure on prices.
Inflation has proved stubbornly above the Fed's 2% target since 2022, accelerating in recent months as the Iran conflict drove up energy costs. Consumer prices rose 3.5% year-over-year in June, down from 4.2% in May, but economists warn that renewed hostilities could push inflation higher again. Core inflation, which excludes volatile food and energy prices, also fell last month.
Rate Differentials Widen as Dissent Risks Grow
Cleveland Fed President Beth Hammack and Dallas Fed President Lorie Logan had signaled before the meeting that they favored action on inflation. Hammack said she saw "no conflict" in the Fed's dual mandate, while Logan warned that "one month of relief is not enough" after the June CPI report. KPMG Chief Economist Diane Swonk had predicted two dissents if the committee held rates steady.
The last time the Fed raised rates was July 2023, when the federal funds rate stood at 5.25% to 5.5% and inflation ran at 3%. The central bank delivered three quarter-point cuts late last year as the labor market softened, but hiring has since picked up, with employers adding an average of about 111,000 jobs per month in the second quarter.
For consumers, the hold means borrowing costs on credit cards, auto loans and mortgages are likely to remain elevated. The average 30-year fixed mortgage rate climbed to 6.58% last week, the highest in 11 months, according to Freddie Mac. Higher energy costs are also eating into household budgets, with the national average for a gallon of regular gasoline at $4.09, up from $3.14 a year ago.
Warsh's press conference at 2:30 p.m. ET will be closely watched for clues on whether the Fed is leaning toward a hike at its September meeting. The chair has declined to provide forward guidance, arguing that markets should react to incoming data rather than central bank signals.
This article is for informational purposes only and does not constitute investment advice.
