Divided Fed Holds Steady on Interest Rates
Federal Reserve policymakers voted to hold interest rates steady at the July meeting, with three Federal Open Market Committee members voting against that decision and urging an increase instead, the central bank announced Wednesday.
In announcing the 9-3 vote Wednesday afternoon, the Fed released this statement:
“The Committee decided to maintain the target range for the federal funds rate at 3-1/2 to 3-3/4 percent, in support of the Federal Reserve’s dual mandate. The Committee is continuing its policy of maintaining ample reserves in the banking system.
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.
Inflation remains elevated relative to the Committee’s 2% goal, in part reflecting supply shocks that have driven price increases in certain sectors, including energy. The Committee will deliver price stability.
3 Members Wanted Increase
Voting against the monetary policy action were Beth M. Hammack, Neel Kashkari, and Lorie K. Logan, who preferred to raise the target range for the federal funds rate by 1/4 percentage point at this meeting.”
Many traders and Fed watchers still believe a hike is possible in September.
NBC News noted that it was the first time since 2016 that there were three dissents in the same direction over a policy change. The vote reveals a growing internal divide over whether the central bank is moving too slowly to tamp down on inflation, NBC said.
In remarks after Wednesday’s announcement, Warsh reiterated the Feds’s commitment to its inflation goal.
“For some households, businesses, and market professionals, five years of high inflation have left a mistaken impression that’s hard to shake that the Fed’s implicit inflation target was somehow above 2%,” he said. “Let me reiterate: there is no soft inflation target. There is no soft implicit target, not on this committee’s watch. There’s only a target, and it’s 2%.”
Earlier this month, Logan noted that some good news on the economic front may not have been good enough.
In fact, she called for “modestly” higher interest rates to win a battle the Fed has been losing for the past five years.
In their July meeting, the policymakers were faced with several competing risks with the persistent inflation and the effects of the war with Iran. The July meeting was the second under new Fed Chair Kevin Warsh.
Inflation has moderated from earlier highs but remained well above the Fed’s 2% target.
CNBC noted that the no votes presented an early challenge to Warsh, whose refusal to provide clear road signs on where monetary policy is headed led to an unusually high level of uncertainty heading into the meeting.
Warsh has argued that the Fed should spend less time trying to tell markets what it will do and instead emphasize the conditions under which action would be taken, CNBC said. Wednesday’s statement provided neither, even with markets largely expecting the Fed to hike in September.
Similar to June Statement
The post-meeting statement again noted that “Economic activity is expanding at a solid pace despite elevated uncertainty that owes, in part, to the conflict in the Middle East.” The statement further said that job growth has “kept pace with the workforce and the unemployment rate has changed little” even as the U.S. labor force has contracted.
As in June, CNBC noted that the July statement concluded with the simple declaratory, “The Committee will deliver price stability.”
Along with Logan, Fed Governor Christopher Waller also voiced worries recently about inflation, saying higher rates could be necessary if more progress isn’t made. Waller, however, voted in favor of a hold at this meeting.
