Fed holds interest rates steady for fifth-straight meeting, but inflation still clouds outlook

By Bryan Mena, CNN

Washington (CNN) — The Federal Reserve on Wednesday held interest rates steady as policymakers continued to navigate an increasingly uncertain inflation picture.

The central bank left its benchmark lending rate unchanged at a range of 3.5%-3.75% for the fifth consecutive meeting — but the decision was not unanimous, with Fed presidents Beth Hammack of Cleveland, Neel Kashkari of Minneapolis and Lorie Logan of Dallas dissenting in favor of a quarter-point rate hike instead.

That marks the most dissents for rates to head in the opposite direction of what the majority decided since September 2016.

Wall Street, however, is already convinced interest rates are heading higher, with investors increasingly expecting more than one rate hike by year’s end.

The Fed hasn’t raised its key interest rate in three years, instead lowering it sporadically since it reached a two-decade high in 2023.

Ahead of this week’s meeting, there was an unusual lack of clarity about the Fed’s next move, as the economic outlook remains clouded by conflicting signals and a lack of guidance from Fed Chairman Kevin Warsh.

Since 2000, Fed officials, including the Fed’s head, have dropped hints through public comments on what they’ll be deciding, a practice known as “forward guidance.” That’s no longer the case under Warsh, who took the helm in May. The Fed’s policy statement, another channel for forward guidance, is now shorter and did not signal if rate hikes are imminent.

Recent data showed that inflation eased sharply in June, but the conflict in the Middle East intensified this month, pushing global energy prices higher. Without a permanent solution to the Iran war, which would likely restore shipping traffic through the region, the global energy market would remain destabilized. Such a scenario would raise the risk of inflation pressures broadening, such as by pushing up airfares and freight costs. At the same time, Fed officials are assessing how the rapid adoption of AI could affect inflation.

“The current situation is not if but when on rate hikes,” said Jason Granet, chief investment officer at BNY. “You have both the leading indicators and the anecdotes all showing inflation moving higher.”

Before Warsh took on his new role at the Fed, the prevailing view among officials was that any uptick in inflation driven by the Iran war would likely be temporary, rendering rate hikes unnecessary. The logic in that argument is that energy prices are volatile in nature and eventually correct themselves without any action from the Fed. The Fed rate moves are also known for having a lagged effect on the economy.

It’s unclear if the majority of officials still hold that view, though the policy statement said inflation has moved higher “in part reflecting supply shocks” related to the Iran war. The Fed’s rate decisions are geared for the demand-side of the economy only.

For now, markets are clamoring to make sense of the Fed’s reaction function under the new chairman. Critics of forward guidance, including Warsh, say the practice is less useful in times of high uncertainty, such as during an unpredictable war that’s having a destabilizing effect on the global economy. Others argue the lack of forward guidance from the chairman could be counterproductive.

“Chair Warsh has been studiously uncommunicative about how the Fed is going to react to these changes in economic conditions,” said Narayana Kocherlakota, an economics professor at the University of Rochester and former president of the Federal Reserve Bank of Minneapolis. “It’s going to lead to market volatility.”

“It makes businesses more reluctant to invest, meaning they’ll be less likely to demand workers to build the kinds of goods and services … because they’re uncertain about what the Fed is going to be doing,” he added.

This story is developing and will be updated.

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