Fed holds rates at 3.5%-3.75% as Warsh vows no inflation wavering

Kevin Warsh kept borrowing costs unchanged but offered markets no roadmap for how the Fed will finally tame inflation.

The Federal Reserve held interest rates at 3.50 percent to 3.75 percent for a fifth straight meeting Wednesday, with Chair Kevin Warsh declaring the central bank "will not waver" on restoring price stability after more than five years of above-target inflation.

"We have begun a new chapter, and we understand that the five-plus years of inflation above target cannot be cured in nine weeks, or by a single month of modest price decreases," Warsh told reporters. "This Fed will not waver. Our credibility rests on performing our duties and delivering on our responsibilities."

The 10-3 vote masked deepening divisions within the Federal Open Market Committee. Beth Hammack of the Cleveland Fed, Neel Kashkari of the Minneapolis Fed and Lorie Logan of the Dallas Fed dissented for a third straight meeting, each preferring a quarter-point increase. The same three officials dissented at Jerome Powell's final meeting in April, then in favor of removing the implied promise of lower rates. Overnight index swaps had priced roughly a 35 percent probability of a hike heading into the decision, while CME FedWatch data shows 76 percent of traders now expect a rate increase by the September meeting.

By abandoning forward guidance — a hallmark of his predecessors — Warsh has left markets to price policy paths without central bank cues. The Dow Jones Industrial Average swung 744 points lower before paring losses to close down 542 points, or 1 percent. The S&P 500 reversed an initial decline to gain 0.2 percent, while the Nasdaq Composite rose 0.5 percent. The yield on the 10-year Treasury note climbed 4 basis points to 4.65 percent, extending a move higher that Warsh said he welcomed.

Warsh said the Fed under his watch is "not in the forecasting business" and will not provide hints about the future path of rates, a sharp break from the communication strategy employed by Powell and Janet Yellen. "We're trying not to interfere with that market signal," he said. "Market participants are learning to play the ball, not the referee."

The new chair's approach has injected a degree of unpredictability into Fed meetings not seen in years. Bank of America strategists found the central bank has never delivered a rate hike with market-implied odds below 60 percent since at least 1994 — yet Warsh came within three votes of doing so with swaps pricing at roughly 35 percent. Citadel Securities and PGIM had assigned a higher probability of a hike this week, betting Warsh would use the opportunity to establish his inflation-fighting credibility.

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Warsh acknowledged that the surge in artificial intelligence-related capital expenditure is making it harder for the Fed to judge the balance between supply and demand. Data center construction is lifting wages for construction workers, adding to broader price pressures even as productivity growth remains strong. "My lens is broader than PCE," Warsh said, referring to the personal consumption expenditures price index that serves as the Fed's official inflation benchmark.

The last time the Fed faced this level of internal dissent over the policy path was in 2023, when a divided committee ultimately delivered 11 rate hikes before pausing. Since then, the fed funds rate has remained unchanged for five consecutive meetings — the longest hold since the tightening cycle ended — while inflation has stayed stubbornly above the 2 percent target.

Warsh said he will check in with the five policy task forces he created last month over the coming weeks, and their findings may inform his keynote address at the Jackson Hole symposium later this month. That speech, he said, remains "a blank piece of paper."

For now, the Fed's next policy decision on Sept. 16 looms as a critical test. If oil prices — which jumped more than 6 percent Wednesday after airstrikes resumed in the Middle East — remain elevated, the case for a hike will strengthen. "The bottom line, from a market point of view, is if oil prices remain elevated in September, the Fed will conclude the oil shock has lasted long enough to demand a rate hike, or hikes," said Chris Low, chief economist at FHN Financial.

This article is for informational purposes only and does not constitute investment advice.