Fed Holds Rates Steady in 9-3 Vote... Growing Expectations for September Hike

First Triple Dissent Since 2016
Energy Price Shocks and AI Investment Raise Inflation Concerns

The U.S. Federal Reserve (Fed) held its benchmark interest rate steady at an annual range of 3.50–3.75% on the 29th (local time). However, as three members of the Federal Open Market Committee (FOMC) voted for a 0.25 percentage point increase, there is growing internal pressure within the Fed to address inflation, which has remained above the target level for more than five years.

Kevin Wash, Fed Chair Nominee_AP Yonhap News

After its regular FOMC meeting, the Fed announced it would maintain the current target range for the federal funds rate. The decision was made by a vote of 9 to 3. Beth Hammack, President of the Federal Reserve Bank of Cleveland; Neel Kashkari, President of the Federal Reserve Bank of Minneapolis; and Lorie Logan, President of the Federal Reserve Bank of Dallas, dissented, calling for a 0.25 percentage point increase in the rate.

In its statement, the Fed noted that these members "preferred to raise the target range for the federal funds rate by 0.25 percentage point at this meeting." This is the first time since September 2016 that three committee members have simultaneously opposed the majority policy course. Ian Lyngen, head of U.S. rate strategy at BMO Capital Markets, remarked, "It reads as a committee where hawks are raising their voices."

Previously, Chair Kevin Wash had advocated for a focus, not on outlining forward guidance for policy, but on emphasizing the conditions under which policy would shift. However, this statement did not provide any specific direction for future rates or present explicit policy conditions going forward.

Energy and AI Fuel Price Increases... Rising Sentiment for Hikes Within the Fed

The contents of the statement were nearly identical to last month's. The Fed assessed, "Despite significant uncertainty, in part due to conflicts in the Middle East, economic activity is expanding at a solid pace." Productivity and capital investment remain strong; job increases are keeping pace with labor force growth, and the unemployment rate has seen little change.

On inflation, the Fed diagnosed inflation as still running above its 2% target. The Fed specifically pointed out that supply shocks, including increasing energy prices in certain sectors, have pushed up prices. As in the previous month, the Fed concluded its statement with: "The Committee is committed to achieving price stability."

The market took note of the unexpectedly strong inclination toward rate hikes within the Fed. Kay Haigh, Chief Investment Officer for Global Fixed Income and Liquidity at Goldman Sachs Asset Management, analyzed, "Even though recent inflation data has been moderate, the Fed appears to be losing patience with inflation running above its target," adding, "The renewed hostilities in the Middle East have likely amplified the committee's hawkish trend."

The members advocating for rate hikes believe that persistent inflation is burdening households and see little clear evidence of a meaningful slowdown. They view the recent inflationary pressures as the result of both the tariff policies of the Trump Administration and the surge in energy prices stemming from tensions with Iran.

The expansion of artificial intelligence (AI) investment is also heightening concerns within the Fed. The injection of hundreds of billions of dollars into data centers and computing facilities could generate demand outpacing the economy's supply capacity. While rate hikes cannot directly address tariff or international oil price increases, proponents of higher rates argue that monetary tightening can restrain demand in other sectors and thus ease supply-side pressures.

Those in favor of hikes consider the current rate level too low relative to the strength of the U.S. economy and elevated inflation. Since prices have remained higher than the Fed expected when it cut rates last year, the real policy rate (adjusted for inflation) has fallen, diminishing the tightening effect of monetary policy.

Fed Governor Christopher Waller also recently warned that higher rates may be needed if inflation does not improve sufficiently, but he supported the hold in this meeting. Conversely, John Williams, President of the Federal Reserve Bank of New York, has affirmed that current monetary policy is well-positioned to bring inflation back toward the target.

Fed Holds Back Signals in Statement... Market Looks to September for Next Hike

In last month's economic outlook, the Fed suggested that a 0.25 percentage point hike may be needed by year-end. While this hold was largely expected in the market, the possibility of a hike was still priced in at about one-third probability before the meeting. There is considerable expectation that rates could rise at the upcoming September meeting, but the latest statement provided no clear signal on this point.

The next FOMC meeting is scheduled for September 15–16. As two more inflation reports will be released before then, inflation trends over the next two months will likely prove decisive for any decision to raise rates.

Although the Fed left the benchmark rate unchanged, The Wall Street Journal (WSJ) noted that households and businesses are unlikely to see their borrowing costs fall any time soon. The federal funds rate directly affects short-term rates such as for credit cards and auto loans, but mortgage rates follow long-term Treasury yields. According to the Mortgage Bankers Association, the average 30-year fixed mortgage rate reached 6.76% last week—the highest in about a year.

If rate hikes materialize, renewed conflict between the Trump Administration and the Fed could emerge. President Donald Trump recently praised Chair Wash as "fantastic," but argued that some other Fed members may have "bad intent" and be acting for political reasons. The White House maintains that Chair Wash does not want to raise rates but is under pressure from hawkish committee members.

This content was produced with the assistance of AI translation services.