US Federal Reserve holds rates steady for fifth consecutive meeting: 5 key takeaways

As widely expected, the U.S. Federal Reserve, led by Chair Kevin Warsh, left interest rates unchanged on Thursday. It was the fifth straight policy meeting at which policymakers opted to keep rates steady while awaiting greater clarity on the inflation outlook and the broader economic trajectory before making any changes to monetary policy.

The decision was announced following the conclusion of the Federal Reserve's two-day Federal Open Market Committee (FOMC) meeting.

The central bank of the world's largest economy kept the benchmark interest rate unchanged at 3.50%-3.75%, while its outlook for inflation, unemployment, and economic activity remained largely unchanged from the June meeting.

While traders on Wall Street saw a 33% chance the Fed would hike rates Wednesday to tamp down inflation, most expected policymakers to hold off, reluctant to risk disrupting financial markets. But 76% foresee a rate hike in September.

A month ago, only 59% of traders expected a September rate increase, AP reported, citing data from CME.

Three Fed officials dissent on rate decision

Three of the 12 policymakers dissented from the majority decision, calling for a 25-basis-point rate hike.

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.

Earlier this week, Trump showed support for Warsh, calling him “fantastic” while noting other Fed officials had “bad intentions” and perhaps had political motivations.

Fed sees economy on solid footing

The U.S. Federal Reserve said economic activity is expanding at a solid pace despite elevated uncertainty stemming, in part, from the conflict in the Middle East.

It added that productivity growth and capital investment remain strong, while job gains have kept pace with workforce growth and the unemployment rate has changed little.

Fed reiterates commitment to price stability

On inflation, the Federal Reserve said price pressures remain elevated relative to the Committee's 2% target, partly reflecting supply shocks that have driven price increases in certain sectors, including energy. It reiterated that the Committee remains committed to restoring price stability.

The central bank's assessment comes as inflation has continued to run above its 2% target for an extended period. Most policymakers have recently argued that a further rate hike may be needed to bring inflation back to the desired level.

The Fed said, "Inflation remains elevated relative to the Committee's 2 percent goal, in part reflecting supply shocks that have driven price increases in certain sectors, including energy. The Committee will deliver price stability."

Inflation peaked at just over 9% in mid-2022 and began to drop in the face of 11 rate hikes by the Fed in 2022 and 2023. But progress has more or less stalled.

Recent inflation easing may prove temporary

A weaker-than-expected reading for June eased pressure on policymakers to raise interest rates at this week's meeting. U.S. consumer prices fell last month for the first time in six years, largely due to lower gasoline prices during a temporary lull in the Iran conflict.

However, Fed officials remain cautious as the recent moderation in inflation may prove temporary. The renewed escalation in the U.S.-Iran conflict has pushed crude oil prices higher again, raising the risk that elevated energy costs could rekindle inflationary pressures in the coming months.

Warsh highlights strong business investment

Speaking at the post-policy press conference, Federal Reserve Chair Kevin Warsh said one of the most notable strengths of the U.S. economy continues to be robust business investment, particularly in technology.

Warsh said the most striking feature of the economy is the strong growth in business investment, adding that the surge in high-tech capital expenditure (capex) has been remarkable.

He noted that investment in AI-related equipment and software has grown by nearly 20% over the past four quarters, according to the latest data, helping sustain healthy momentum in the manufacturing sector.

More broadly, Warsh said rising capital expenditure is laying the foundation for future economic growth. However, he cautioned that the timing and magnitude of its impact on the economy's supply side remain difficult to predict.

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