Divided Fed Leaves Interest Rates Unchanged

A divided Federal Reserve left interest rates unchanged Wednesday at 3.5% to 3.75%, choosing to wait to see if elevated inflationary pressures might continue to fade without a rate hike. But with a 9-3 vote, the dissenting votes raise the pressure for a rate hike at its September meeting.

The dissenting committee members—Beth Hammack, Neel Kashkari, and Lorie Logan—had grown more vocal in recent weeks about what they said was the need to raise rates to contain price pressures.

In his press conference, Fed Chair Kevin Warsh said the policy committee had a "good family fight" but stressed that the members were unified in their commitment to price stability.

"The committee remains resolute. You've heard this before, but we will maintain price stability," he said.

Warsh said that during the meeting the committee was focused on "understanding underlying inflation amid shocks," and the degree to which those shocks are broadening inflation.  

Warsh defended his decision to abandon forward guidance. He noted that nominal and real yields have risen across the curve in recent weeks, attributing that to the market's attention being focused on data rather than Fed guidance. "Market participants are learning to play the ball and not the referee," he said.

Warsh added that he was committed to holding press conferences after each policy meeting this year. He previously indicated that he might do so only when he had something useful to say.

Recent inflation data was seen buying the Fed some time. The Consumer Price Index rose 3.5% in June from a year earlier, down sharply from 4.2% in May, largely due to falling oil prices. Core inflation, which excludes food and energy, slowed to 2.6% from 2.9%. Notably, core inflation also modestly fell on a month-over-month basis, its first monthly decline since May 2020.

The labor market has been on solid footing after stabilizing in recent months. Employers added only 57,000 jobs in June, but jobless claims recently hit a multi-decade low. Hourly wages grew only 3.5% on a 12-month basis, a level not seen as inflationary.

The Fed will now have until its September meeting to monitor how inflation data evolves. Upside surprises could make a hike this year more likely. The next data release comes tomorrow, with the Personal Consumption Expenditures price index for June and the first estimate of second-quarter economic growth.

The Fed standing pat also gives the committee time to see if the labor market continues to stabilize and how events in the Middle East affect oil prices.

The risk for the Fed is that inflationary pressures—including tariffs and the AI buildout—might keep growing while it waits for more data. Given the volatility in the Middle East, oil prices might also surge again, remain elevated, and start driving broader price increases. So far, though, inflation expectations, a key Fed concern, remain well-anchored.

The Fed's policy statement was mostly unchanged from a month earlier, except to note dissenting votes by three members who supported a rate hike of a quarter percentage point. The Fed didn't release any new economic projections.

Investors had seen a hold as the most likely outcome of Wednesday's meeting, with the CME FedWatch Tool showing a 35.8% chance of a hike as of Wednesday morning. Still, that was up from a 10.7% chance on July 15, reflecting the surge in oil prices following a flare-up of U.S.-Iran hostilities.

Immediately after Warsh's press conference, the market saw a 60.1% chance of a hike in September, according to the FedWatch Tool, down from a 78.8% chance on Wednesday morning.

The Fed's so-called "dot plot" of economic projections from its June meeting showed nine members were projecting at least one hike in 2026, while eight others projected rates to remain unchanged. There was still one dot projecting a rate cut this year.