The U.S. Federal Reserve left its key interest rate unchanged Wednesday, although three officials dissented in favor of higher rates as the central bank wrestles with how to deal with persistently high inflation.
The Fed’s rate-setting committee reached its decision after two days of deliberations, marking the fifth straight meeting at which the benchmark rate was kept at around 3.6%.
Some economists and Wall Street analysts had predicted the Fed would hike its rate by a quarter point. But while the decision to stand pat could be seen as good news for consumers, they might not feel much relief with the average credit card rate still near 20% and mortgage rates the highest since last August.
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.
In addition, the vast amounts of money being spent by technology companies on artificial intelligence are both driving manufacturing and have resulted in increased prices for items such as computer chips and electricity.
President Donald Trump’s tariffs on foreign goods are also adding to inflation pressures.
The three officials who dissented — 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 — had previously called for or signaled that they would be open to raising rates to combat high prices.
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“The dissents send a clear message: The Fed is not yet convinced the inflation battle has been won,’’ said Seema Shah, chief global strategist at Principal Asset Management.
At a press conference following the rate decision, Fed Chair Kevin Warsh reiterated the Fed’s commitment to combatting inflation. At the same time, Warsh said, “We have no magic wand. This isn’t something we’re going to be able to carry out in days or weeks.”
Warsh said he welcomed vigorous debate at the committee meeting. “I asked for a good family fight and I got one,” he told reporters at a press conference.
Warsh, who was appointed by President Donald Trump, has sought to bring a number of changes to the Fed including giving financial markets fewer signals about the Fed’s thinking on interest rates. He said he believed that reticence was a factor in the bond market pushing up yields in the past few weeks as it weighed new economic data. The yield on the 10-year Treasury has risen from around 4.50% in mid-June to 4.64% just ahead of the Fed’s rate decision.
The market is “learning to play the ball and not the referee,” Warsh said.
Coming into Wednesday, traders on Wall Street saw a 33% chance the Fed would issue a rate hike, although most expected policymakers to hold off, reluctant to risk disrupting financial markets. But they give a 55% chance of a rate hike in September, according to data from CME.
Trump, who had persistently pressured the Fed to cut rates, voiced support for Warsh. “He’s fantastic. He’s a brilliant guy. Smart. 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,” Trump told reporters.
Fed officials likely want to see more economic data before changing the benchmark 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.
Adding uncertainty to the Fed’s decision-making process is the rising violence in Iran. The price of oil briefly blasted past $100 a barrel last week on intensifying fighting. It’s since settled down on hopes the United States and Iran can find some way to reduce tensions.
Yet early Wednesday, Jordan intercepted missiles launched from Iran early just hours after the U.S. military said it knocked down another Iranian barrage launched against American forces in the Middle East, ending a brief pause in fighting.
After the U.S. and Israel attacks on Feb. 28, Iran shut down the Strait of Hormuz – through which a fifth of the world’s oil and natural gas pass. That caused the greatest disruption in oil supplies in history and sent energy prices surging. They’ve since bobbed up and down depending on the ever-changing state of the conflict and negotiations to de-escalate it, but the average cost for a barrel is $10 to $15 more today than it was at this point last year.
Inflation has exceeded the Fed’s 2% target since early 2021 when the U.S. economy overheated as it roared back from COVID-19 lockdowns. Inflation peaked at just over 9% in mid-2022 and began to drop in the face of 11 rate hikes by the Fed in 2022 and 2023. But progress has more or less stalled.
So-called core inflation – which excludes volatile food and energy prices – cooled in June, partly because apartment rents aren’t rising as fast as they had been. And a temporary drop in gasoline prices last month also helped contain overall inflation.
But several Fed policymakers have been arguing that the Fed will have to raise rates to return inflation to the 2% target.
“Sternly staring at inflation until it melts before our withering gaze is not an option,’’ Christopher Waller, an influential member of the Fed’s governing board, said in a speech this month.
AP Writers Josh Boak and Damian Troise contributed to this story.
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