The Federal Reserve left its benchmark interest rate unchanged Wednesday after a divided policy meeting in which three regional bank presidents favored a quarter-point increase amid renewed inflation concerns.
By yourNEWS Media Newsroom
The Federal Reserve held its benchmark interest rate steady Wednesday, maintaining a target range of 3.5% to 3.75% as most policymakers concluded that solid economic growth and a stable labor market did not yet require another increase despite uncertainty surrounding inflation and the conflict in the Middle East.
Nine voting members of the Federal Open Market Committee supported leaving rates unchanged at the conclusion of the panel’s two-day meeting. Cleveland Federal Reserve President Beth Hammack, Minneapolis Fed President Neel Kashkari and Dallas Fed President Lorie Logan dissented, each preferring to raise the rate by one-quarter of a percentage point.
New York Fed President John Williams and Philadelphia Fed President Anna Paulson joined all seven Federal Reserve governors in supporting the decision to hold rates steady.
“Economic activity is expanding at a solid pace despite elevated uncertainty that owes, in part, to the conflict in the Middle East. Productivity growth and capital investment are strong. Job gains have kept pace with the workforce, and the unemployment rate has changed little,” the Fed said in its post-meeting statement.
The outcome followed an unusually uncertain period for financial markets. Futures trading immediately before the meeting indicated investors were assigning approximately a 30% probability to a rate increase, reflecting divisions among Fed officials and conflicting economic signals involving inflation, energy prices and growth.
The three dissenting officials had previously objected to language in the Fed’s April statement that suggested the central bank’s next move was more likely to be a rate reduction than an increase. Their votes Wednesday demonstrated that a significant minority of policymakers believes inflation risks remain strong enough to justify tighter monetary policy.
Projections released after the Fed’s previous meeting showed officials sharply divided over the path of rates during the remainder of the year. Eight expected at least one increase, including five who projected two hikes, one who anticipated three and three who forecast a single increase. Eight officials expected no increases, while one believed a quarter-point reduction would probably be appropriate.
Those forecasts are presented through the Fed’s summary of economic projections, commonly known as the “dot plot.” The document includes estimates from the 12 voting members of the Federal Open Market Committee—the chairman, the New York Fed president, seven Fed governors and four regional Fed presidents serving on a rotating basis—as well as the remaining regional bank presidents who do not vote at every meeting.
The Fed has generally released the projections at every other scheduled meeting, a practice that developed in the years following the financial crisis. Chairman Kevin Warsh has said he is reviewing whether the central bank should continue publishing them in their current form.
Warsh declined to submit his own projections at the previous meeting, saying he did not believe that type of forward guidance was appropriate under existing economic conditions. The Federal Open Market Committee holds eight scheduled meetings each year.
Recent economic developments have caused policymakers to place greater emphasis on inflation while becoming more confident in the strength of employment and economic activity. Inflation measures rose sharply after the United States and Israel attacked Iran and Tehran responded by effectively closing the Strait of Hormuz, a major shipping route for oil from the Persian Gulf.
The disruption sent crude oil and gasoline prices higher, contributing to a significant increase in the consumer price index. Broader inflationary pressure appeared more limited, however, and the index declined in June after gasoline prices fell sharply. The unusual negative monthly reading brought the annual inflation rate down by more than financial markets had anticipated.
Gasoline prices have since begun rising again as fighting has resumed intermittently, cease-fires have been announced and abandoned, and wider peace negotiations have shown little apparent progress. The national average price for a gallon of gasoline has reached nearly $4.10, according to AAA, compared with $3.86 one month earlier.
At a news conference following the decision, Warsh said the comparatively weak June inflation report played very little part in the committee’s determination to hold rates steady.
Conventional monetary policy generally advises central banks against responding aggressively to isolated supply shocks, such as an energy-price surge caused by restrictions on oil production or shipping. Fed officials are nevertheless concerned that repeated inflationary episodes could lead households and businesses to expect elevated price increases to continue.
Under the Fed’s economic framework, inflation expectations can influence actual inflation as workers, businesses and consumers adjust wages, prices and spending behavior. Policymakers therefore seek to keep those expectations “anchored,” meaning the public continues to believe inflation will eventually return to the central bank’s target.
The economic models commonly used by Fed officials treat labor-market conditions and inflation expectations as important sources of sustained price pressure. Most policymakers and central bank economists do not believe the current job market is generating significant inflation, particularly because employment gains have kept pace with growth in the available workforce.
Interest-rate policy cannot directly lower the cost of crude oil or gasoline when prices rise because of disrupted supplies. Higher borrowing costs can, however, slow spending and investment, reduce demand for energy and reinforce expectations that the Fed will not allow inflation to remain elevated.
Warsh reiterated that the central bank remains committed to returning annual inflation to 2%, which the Fed considers consistent with its congressional mandate to maintain price stability.
The Fed continues to measure progress toward that objective primarily through the personal consumption expenditures price index, a practice it reaffirmed in January before Warsh began his term. Warsh said Wednesday that he also examines inflation through a broader “lens” to assess underlying price pressures throughout the economy.
The chairman also confirmed near the end of his news conference that he intends to continue holding post-meeting briefings through the end of the year. His earlier calls for Fed officials to speak less and avoid excessive forward guidance had led some observers to question whether the regular news conferences might be discontinued.
Federal Reserve chairmen did not routinely hold formal post-meeting news conferences until 2011, when Ben Bernanke began appearing before reporters after every other meeting. Janet Yellen maintained that practice, while Jerome Powell expanded it by holding a news conference after each of the committee’s eight annual meetings.
Wednesday’s decision leaves borrowing costs unchanged while preserving the possibility of a rate increase later in the year. The divided vote and the previous projections indicate that future action will depend heavily on whether energy-related inflation broadens into other parts of the economy and whether expectations of higher prices begin to take hold.
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