The Federal Reserve (Fed) kept interest rates unchanged on Wednesday, maintaining the federal funds rate targeted between 3.5%-3.75% for a fifth consecutive meeting. The Fed last cut rates in December 2025.
Ahead of the meeting, the markets were unsure what to expect, as the probability of a rate hold stood at 64% just prior to the decision. This has now risen slightly to 67%, according to CME’s FedWatch.
Split Vote Rattles U.S, Stock Market
The Federal Open Committee Market (FOMC) decision was a split vote, with three members voting to raise rates by a quarter-point. This is a significant change from the June vote, when all nine members voted to maintain rates at the current level. This shift towards a tighter policy hasn’t resulted in a rate hike – for now. However, if inflation moves higher, there will be more pressure on Fed Chair Kevin Warsh to raise rates.
For his part, Warsh his holding his cards close to his chest. There was no change to the policy statement and Warsh didn’t provide any hints as to the Fed’s rate path at his follow-up press conference. Warsh said that the labor market is “solid” and added that while inflation remains high, the Fed did not have an implicit inflation target above 2%, stressing that “there’s only a target, and it’s 2%.
At the June meeting, the Fed “dot plot”, which is the Fed’s updated rate projection, showed that half of policymakers expected to raise rates before the end of the year, with the other half anticipating that rates would remain unchanged.
Inflation fell in June to 3.5%, down sharply from 4.5% a month earlier. Still, that is well above the Fed’s 2% target, and with the current escalation in fighting in the Persian Gulf, oil prices are likely to rise, which will send inflation higher. Iran has become a major headache for Fed Chair Warsh, as higher energy prices are frustrating his goal of lowering rates.
US Dollar Steady, Stock Market Gives Warsh a Thumbs Down
The US Dollar is showing a muted reaction to the Fed decision to hold interest rates, with modest gains against the major currencies on Thursday. The GBP/USD currency pair is down 0.21%, trading at 1.3338. EUR/USD is down 0.27%, trading at 1.1435.
The US stock market posted sharp losses on Wednesday, as investors reacted negatively to the Fed’s split vote and the strong possibility of a rate hike in September.
The S&P 500 Index fell by 112 points (1.52%) and closed the day at 7,316.
The Nasdaq 100 Index declined by 570 points (2.06%) and closed at 27,192.