Federal Reserve Keeps Interest Rates on Hold
Players in the financial markets have recently been at odds with one another as to whether or not the Federal Reserve would hike or keep interest rates on hold. Today, the FOMC (Federal Open Market Committee) kept rates steady at a range of 3.5% – 3.75%, marking the fifth consecutive meeting that the central bank has opted to keep rates on hold. Policymakers voted by 9 – 3 in favour of a rate hold with Cleveland Federal Reserve, President Beth Hammack, Minneapolis Federal Chairman, Nel Kashkari, and Dallas Federal Reserve, President Lorie Logan, being the three dissenting voices who all voted to hike rates.
Officials hinted that an interest rate rise could arrive this September, as the continuing Middle East conflict has ensured a rapid rise in energy prices. Officials suggest this could be a catalyst for an increase in headline inflation, which in June this year fell to 3.5%, the first decline in five months, but still remains elevated above the central bank’s target of 2%. Indeed, the inflation rate has remained elevated above the Federal Reserve’s target for more than five years, with a dissenting governor, the Dallas Federal Reserve Chairman saying, “Every month of above-target inflation has compounded the strain on Americans’ budgets”.
In a post-meeting press conference, Federal reserve Chairman Kevin Warsh explained why interest rates were not raised this time around by saying, “If inflation continues to be elevated through the forecast period, interest rates could well be part of that solution, but I wouldn’t say it’s in isolation”. The Chairman went on to explain that market rates since their last policy meeting had climbed anyway, suggesting that investors are doing some of the work for the Federal Reserve. The chairman stated that this was partially due to his decision to row back on future potential rate moves the central bank usually offers in on-going statements. He added, “Markets have made decisions because we stepped back in part from trying to influence them. Market judgements have moved up on what nominal rates are across the Treasury curve”.
Experts point out that combined with an AI fed boom in demand, the current on-going US/Iran/Israel conflict, (now almost five months old), and a new slate of tariffs, inflation could remain in an elevated position for some time to come. Indeed, with the stop go policies regarding the Middle East conflict emanating from the White House, the price of crude oil bounces between above $100p/bl to somewhere between $85 – $90p/bl, suggesting that if the war stopped tomorrow, consumers would not see their energy bills decrease for many months to come.
Analysts point out that some of the pressure was taken off policymakers to raise rates due to data confirming a reduction in inflation last month, with consumer prices falling for the first time since 2020. However, policymakers remain under pressure from when the White House restarted the Middle East conflict, which sent oil prices past the $100p/bl mark, despite the fact it now hovers around the $83p/bl mark. Analysts point to the swaps/futures markets which are pricing in circa 70% possibility of a 25 basis point rate hike at the FOMC’s next policy meeting on September 15 – 16, 2026, which would lift the target range of Federal Funds from 3.50% – 3.75% to 3.75% – 4.00%. Indeed, driven by persistent inflationary pressure and hawkish dissent within the FOMC, short-term interest rate swaps and futures are favouring tightening over cuts.
