In its first meeting under the new chair, Kevin Warsh, the United States Federal Reserve held interest rates unchanged between 3.5% and 3.75%, as the 12-member Federal Open Market Committee (FOMC) got split on whether to keep the apex bank’s monetary policy steady or increase it to tame inflation, which has been pushed up by the Iran war.
It is to be noted here that President Donald Trump pushed Warsh’s predecessor, Jerome Powell, to cut interest rates, something that became a bone of contention between the former central banker and the Republican. Trump, while appointing Warsh for the Fed’s top job, said he expected the 56-year-old to fulfill his demand for rate cuts as the crucial midterm polls near.
However, with inflation running at an above-target 3.8% and uncertainty surrounding the peace deal with Iran, the Fed’s rate-setting committee unanimously decided to keep rates steady.
The FOMC noted, “Economic activity is expanding at a solid pace despite elevated uncertainty that owes, in part, to the conflict in the Middle East. Productivity growth and capital investment are strong. Job gains have kept pace with the workforce, and the unemployment rate has changed little.”
Inflation hit 3.8% in April, largely due to the Iran war and the closure of the strategically important Strait of Hormuz. As per the US Bureau of Labor Statistics (BLS), price rises, mainly driven by a spike in energy costs, have become a key pain point for the American economy.
The central bank’s update also reportedly removed a statement hinting that it was leaning towards lowering interest rates in the future. Around nine of the 18 central bankers who participated in the FOMC’s rate-setting process predicted an interest rate hike in 2026, while just one expected a cut. The remaining eight predicted rates will stay the same, according to the closely watched “dot-plot” grid of central bankers’ expectations released alongside the decision.
Samuel Tombs, chief US economist at Pantheon Macroeconomics, told the BBC that the “big news” from the crucial Fed meeting was the “dot plot” pointing to potential interest rate hikes before the end of the year.
Trump, reacting to the Fed’s latest decision, commented, “It’s alright… whatever. It could happen… it’s hard to believe (on potential interest rate hikes). It just keeps the country down; it is so unusual.”
However, the Republican heaped praise on Warsh, stating, “We have a very good guy over there now, so I’m guided by what he wanted.”
Talking about the Fed leadership change, Warsh termed his appointment as “a natural and timely opportunity to reaffirm its (the Fed’s) mission and to review current practices.”
“Forward-looking guidance from the Fed was unhelpful to discussions about interest rates and other monetary policy decisions. The new, slimmed-down statement just gives you the facts as best we can judge it,” he commented further.
Warsh also spoke about “moving quickly” to reshape the Fed’s policy-setting method. He has launched task forces to examine five areas of how the central bank works: how it communicates, the size of its balance sheet, its use of economic data, the link between productivity and jobs, and its framework for managing inflation.