Still No Rate Change Despite Fed's Vow to Rein in Inflation

The Federal Reserve left interest rates unchanged Wednesday in a highly anticipated decision. As U.S. inflation remains elevated and the war in Iran is affecting especially the price of energy, three out of 12 regional Fed presidents dissented to the majority decision, saying they would have raised rates to combat inflation. Price increases in the United States came down from their peaks in June amid a memorandum on Iran, but the situation has since changed. Kevin Warsh, Fed chair since May, has taken a tough stance on inflation, but is yet to deliver action. Markets still predict a coming rate hike, but probabilities are low(ish).

The benchmark interest rate continues to stand at the target range of 3.50 to 3.75 percent. The so-called dot plot, i.e. the committee members’ individual assessments of the right policy path ahead, revealed that nine of the 18 committee members who submitted a dot in June – Chairman Warsh chose to abstain – are projecting at least one rate hike this year, while only one Fed official penciled in a rate cut for the remainder of 2026. Looking further ahead, FOMC members in June signaled higher-for-longer rates, with median projections for 2027 and 2028 up 0.50 and 0.25 percentage points, respectively, compared to the March meeting.

When Trump nominated Kevin Warsh to succeed Jerome Powell as Fed chair, he had almost certainly hoped for a different outcome of his first policy meeting. However, the war in Iran and the energy price shock that followed have made it all but impossible for the Fed to lower interest rates right now. If anything, a more hawkish Fed may have decided to raise rates now in light of the latest inflation surge. The chosen wait-and-see approach is actually more in line with previous Fed policy under Powell.

The two first Fed decision will, however, be considered an encouraging sign by those doubting the Federal Reserve’s independence under its new leadership. Warsh reiterated that the Fed’s remit remains the same – price stability.