The US Federal Reserve kept interest rates unchanged on Wednesday but left investors uncertain over its next move after chairman Kevin Warsh reaffirmed the central bank’s commitment to tackling inflation without signalling whether another rate hike is imminent.
The Federal Open Market Committee voted to maintain its benchmark interest rate at 3.50% to 3.75%, although three of its 12 members dissented in favour of a 25-basis-point increase.
Warsh said the Fed remained firmly focused on restoring price stability, while stressing that any decision would depend on incoming economic data.
“This Fed will not waver.”
He acknowledged that central bankers faced with a resilient labour market and persistent inflation would generally be “more inclined to tighten policy”, but stopped short of indicating that a September rate increase was certain.
“If inflation continues to be elevated through the forecast period, interest rates could well be part of that solution, but I wouldn’t say it’s in isolation.”
The Fed’s decision prompted traders to trim expectations of a September rate increase. According to CME Group’s FedWatch Tool, markets now assign a 57% probability of a rate hike in September, down from almost 100% before the meeting.
Warsh also welcomed the recent rise in bond yields, noting that financial markets had adjusted policy expectations independently rather than reacting to comments from Fed officials.
The mixed messaging left economists divided. Bank of America said markets were questioning the Fed’s credibility, arguing that restoring confidence could increase the likelihood of a September rate hike. Inflation Insights president Omair Sharif said he expects the Fed to raise rates by 25 basis points in September unless labour market conditions weaken sharply or core inflation slows significantly over the next two months.
Reuters
