Washington (United States) (AFP) – The US Federal Reserve held interest rates steady on Wednesday, with Chair Kevin Warsh lauding a “family fight” that saw three policymakers dissent in calling for a rate hike to combat surging inflation. US households have been battered by years of high prices, and inflation has spiked on the back of President Donald Trump’s war on Iran since March, with skyrocketing energy prices bleeding through into other products.
The Fed held rates at 3.50-3.75 percent for the fifth straight meeting, with Warsh denying that he was reticent to take action against high prices. “We are on the job. We will deliver. We are focused like a laser, making sure we can do it,” he said, adding that there was “no magic wand” with which the Fed could lower inflation quickly. Warsh insisted the economy was showing “impressive resilience, with recent shocks.” The new Fed chair was nominated by Trump, who has exerted unprecedented pressure on the central bank to lower rates in a bid to turbocharge the economy, despite rising prices.
On Wednesday, Trump praised Warsh and claimed that the Fed chair would “love to see lower interest rates,” adding without evidence that other board members were making decisions on a political basis.
– ‘Family fight’ –
Since taking office in May, the new Fed chair has repeatedly said he wanted a “good family fight” at rate decision meetings. On Wednesday, he said he got one, with three regional Fed presidents dissenting from the majority and recommending the central bank raise rates by a quarter percentage point. “Most of our discussions were on the big questions that matter to the conduct of monetary policy. We didn’t sort of hide from them,” Warsh told reporters. “There was a lot more interaction between and among my colleagues. It was a real family fight.”
It is rare for that many FOMC members to differ from the majority’s vote. They are not the only ones flagging the potential need to address inflation using rate hikes. In addition to the three dissenters, Fed Governors Christopher Waller and Lisa Cook have also signaled their concern in recent weeks. “We may have a new chairman, but the old guard is now worried about where the economy has moved since the beginning of the year,” said Diane Swonk, chief economist at KPMG, ahead of the decision. Warsh, however, dismissed talk of a potentially divided Fed, saying he left the two-day meeting with confidence that the central bank would achieve its two percent inflation goal.
The Iran war has seen US inflation hit a three-year high, rising back to levels last seen when it was climbing down from its pandemic-era peak of 9.1 percent. In May, the Fed’s preferred inflation gauge hit 4.1 percent year-on-year, with fresh data due later this week. US inflation has been fueled by Trump’s disruptive tariff policies, spiraling energy and fertilizer prices from his war on Iran, as well as by the massive demand generated by the AI boom. The trajectory of each factor is, however, “uncertain in timing and scope,” said Oxford Economics chief economist Michael Pearce.
– Markets reacting ‘directly’ –
Warsh took over the Fed with an ambitious reform agenda, including changing how much the central bank communicates about how it makes policy. On Wednesday, he echoed earlier comments about not wanting markets to look at the Fed’s communications, but instead react “much more directly” to events. Following the Fed’s meeting, 30-year US Treasury yields hit their highest levels since 2007, indicating that traders believe a slower approach to tackling inflation would take longer to work. Major US indices lost more than 1.5 percent on Wednesday, driven in part by the Fed’s decision.
“Market participants are learning to play the ball, not the referee, and market prices will continue to respond in the direction and magnitude they see fit,” said Warsh. Swonk, however, warned that waiting to take on inflation ran the risk of allowing price rises to become normalized in how households and businesses plan their finances. “There is a risk we will need more aggressive rate hikes to reduce inflation, which is due to both demand and supply factors,” she said in a note.
© 2024 AFP
