Fed holds interest rates as new Iran tensions raise inflation risks

The central bank said on Wednesday that it will maintain rates at 350-375 basis points during the second monetary policy decision under new Chairman Kevin Warsh.

By comparison, daily petrol prices were $2.98 ($0.78 per litre) when the US and Israel first struck Iran on February 28.

What we know

In a 9-3 decision, the Federal Open Market Committee (FOMC) maintained its baseline interest rate at a range of 3.5 percent to 3.75 percent. The Consumer Price Index report released in July for the month of June by the US Labor Department’s Bureau of Labor Statistics showed a 0.4 percent decline in consumer inflation, marking the first monthly decline since April 2020 in the early days of the COVID-19 pandemic.

“Consumers anticipate little improvement in business conditions over the next six months,” Dana M Peterson, chief economist at The Conference Board, said upon the report’s release. Despite increasing support among some officials for a rate increase, the Federal Open Market Committee voted 9-3 to leave the federal funds rate in a range between 3.5% and 3.75%.

All of the "no" votes came from regional presidents – Beth Hammack of Cleveland, Neel Kashkari of Minneapolis and Lorie Logan of Dallas – who had been the most explicit about the need for higher rates to address inflation that has been above the Fed's 2% target for more than five years.

The details

“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. Warsh had previously said that there was “no tolerance” for inflation as the central bank pushes to reach the Fed’s 2 percent target. The CPI remains elevated at 3.5 percent on an annual basis, according to the report, though that is still a slowdown from 4.2 percent in May. The post-meeting statement was almost identical to the one following the June 17 decision and was in keeping with the Fed's actions all year, following three rate cuts in the latter part of 2025.

Reactions

“With little guidance on the reaction function under the new chairman, markets are filling the void with speculation that Warsh may be eyeing a surprise hike to reinforce anti-inflation credibility,” Barclays economists said in a note. “Kevin is fantastic,” he told reporters on Monday on board Air Force One. For his part, Warsh has called inflation "a choice," and he repeatedly stressed the importance of getting prices in check during recent hearings on Capitol Hill.

What to watch

Markets largely had expected the central bank policymakers to approve another hold on rates, though there had been some inclination – about a 1-in-3 chance, according to the CME Group's FedWatch tool – that a surprise rate hike was in the cards. As in June, the statement concluded with the simple declaratory, "The Committee will deliver price stability." Officials favoring tighter policy argued inflation has been a burden on households and is not showing clear signs of abating.