The Federal Reserve kept its benchmark interest rate at 3.5%-3.75% on Wednesday, choosing not to tighten policy even as higher energy costs and supply disruptions continued to complicate the inflation outlook. The decision was the central bank’s second policy announcement under Chair Kevin Warsh and reflected a committee divided over whether current price pressures require another increase.
Officials said inflation remained above the Fed’s 2% objective, with recent supply shocks pushing up prices in energy and other parts of the economy. The majority backed holding rates at their existing level, while Beth Hammack, Neel Kashkari and Lorie Logan supported a quarter-point increase.
A divided outlook for interest rates
Market expectations leaned toward no change before the announcement. CME FedWatch data indicated a 66.3% probability that the target range would remain at 3.5%-3.75%, compared with a 33.7% chance of an increase to 3.75%-4%.
The split vote illustrates the difficulty of setting policy when inflation signals are moving in different directions. Warsh said officials were assessing the combined effects of pandemic-era supply constraints, military conflicts, interruptions to energy supplies, higher tariffs and a surge in investment linked to artificial intelligence. He also stressed that the committee was looking at broader trends rather than treating any single economic release as decisive.
Warsh has moved away from the detailed forward guidance that investors previously used to anticipate the Fed’s next step. That change has widened the range of market forecasts. Economists at Barclays suggested policymakers could consider a surprise increase to reinforce their inflation-fighting credentials, while Citadel Securities also expected a rise. Analysts at S&P Global forecast that rates would remain unchanged.
The uncertainty follows a previous meeting at which governors were evenly divided over whether rates should rise during the year. Warsh has repeatedly presented price stability as the central bank’s priority, making clear that persistent inflation would not be treated lightly.
Inflation eases, but household costs remain high
Recent consumer-price data gave policymakers some evidence that inflation was cooling. The Consumer Price Index fell 0.4% in June, according to the Bureau of Labor Statistics, reversing a 0.5% increase in the previous month. It was the first monthly decline since April 2020. Annual inflation slowed to 3.5% from 4.2% in May, but remained well above the Fed’s target.
Energy costs continue to affect household budgets. The American Automobile Association reported an average petrol price of $4.09 a gallon, up from $3.86 one month earlier and $2.98 when the United States and Israel first struck Iran on February 28. Those increases help explain why lower headline inflation has not yet translated into a broad sense of relief for consumers.
Consumer confidence has also weakened for three consecutive months. Dana Peterson, chief economist at The Conference Board, said households expected little improvement in business conditions over the next six months. The combination of slowing inflation, elevated fuel prices and weaker confidence leaves the Fed balancing the risk of tightening too aggressively against the danger that price growth remains entrenched.
White House pressure remains in view
The rate decision also comes amid continued political pressure on the central bank. President Donald Trump has repeatedly argued for lower borrowing costs and previously criticised former Fed Chair Jerome Powell. Trump has so far taken a warmer public position toward Warsh, calling him “fantastic”, while also describing members of the policy board as political.
The Fed maintains that its decisions must remain independent of the White House. That principle is likely to face further scrutiny if inflation stays above target and policymakers remain divided. For now, the central bank has chosen to wait for a clearer economic trend before changing rates, while leaving open the possibility of action if energy and supply pressures persist.
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