FOMC Holds Rates Steady at 3.50%-3.75% Even as Three Officials Favor a Quarter Point Hike

The Federal Open Market Committee is seen keep interest rates on hold for a fifth straight time on Wednesday, undeterred by a 48% jump in crude oil this year that has helped keep inflation elevated.

The committee left the target range for the benchmark federal funds rate unchanged at 3.50% to 3.75% range. This expected pause unfolds against a backdrop where WTI crude jumped over 7% to trade above $85 a barrel following fresh Middle East escalations, which significantly complicates the macroeconomic picture.

While nine members of the committee voted for a pause, Beth M. Hammack, Neel Kashkari, and Lorie K. Logan dissented, saying they preferred to raise the target range for the federal funds rate by a quarter percentage point at this meeting, according to the FOMC statement released at the end of the two-day meeting.

Warsh stressed the material increase in nominal and real yields since the Fed's last meeting 42 days ago, signaling that financial markets are doing the work of pushing rates up.

"In fact, some of the increases in market interest rates between FOMC meetings are among the most significant in the last two decades, ranking around the top decile or so," he said.

After Warsh's press conference, the odds of a rate hike of at least a quarter percentage point in September slipped to 59.1%, from 68% less than 30 minutes earlier, according to the FedWatch tool. Meanwhile, prediction markets are now at 54%, down from 66% just before the Fed chair started speaking.

Today's FOMC statement was almost exactly the same as last month's, except for the outcome of the vote.

"As before, the policy statement conveys just the facts," Fed Chairman Kevin Warsh said in a press conference Wednesday after the decision was released. "It's steering clear of forecasting, a choice we consider especially prudent at these uncertain times. Uncertainty, however, does not mean a lack of clarity."

He reiterated that the FOMC's implicit inflation target remains at 2% even as the gauge has stayed stubbornly above that target.

"We have begun a new chapter and we understand that the five-plus years of inflation above target cannot be cured in nine weeks or by a single month of modest price decreases," Warsh said. "This Fed will not waiver. Our credibility rests on performing our duties and delivering on our responsibilities. Americans are right to expect that because our nation's prosperity depends on it."

While core inflation has shown occasional signs of cooling, five straight years of prints above the Fed's 2% target have tested policymakers' patience. Fed Chair Kevin Warsh recently signaled to Capitol Hill that he has no tolerance for lingering inflation.

Adding fuel to the fire, energy markets surged after President Donald Trump said Iran would be hit hard in retaliation against the Islamic Revolutionary Guard targeting a U.S. airbase and command center in Jordan. The spike in oil prices has stoked fears of a secondary inflationary wave, which strengthens the case for a rate hike.

Momentum for a September rate hike has accelerated as investors brace for the release of critical second-quarter GDP and June PCE inflation prints later in the week.

The last dot plot released by the Fed last month showed nine of the FOMC members were expecting at least a quarter point rate hike by the end of the year, while eight others were seeing no change and one of them penciled in a cut this year. In that previous meeting, Warsh opted not to add his projection to the dot plot, consistent with his previous statement against giving any forward guidance.

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