Fed Holds Rates for Fifth Straight Meeting... Dissent by Three Hawks Raises Odds of September Hike (Comprehensive)

First Three Same-Direction Dissents Since 2016

Wash: "Will Not Hesitate to Act If Needed"

Heated Debate Over AI Investment, Energy Shocks, and Inflation Spillovers

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

After concluding its regular July FOMC meeting, the Fed announced that it would maintain the target range for the federal funds rate at its current level. This marks the fifth consecutive time the rate has been held steady, following similar decisions in January, March, April, and June this year.

Kevin Wash, Fed Chair. Photo by AP Yonhap News

The decision was made with a 9-to-3 majority. Beth Hammack, President of the Federal Reserve Bank of Cleveland; Neel Kashkari, President of the Minneapolis Fed; and Lorie Logan, President of the Dallas Fed, all voted against the decision, advocating for a 0.25 percentage point rate hike. The Fed’s statement noted that these members “preferred raising the target range for the federal funds rate by 0.25 percentage points at this meeting.”

This is the first time since September 2016 that three committee members have dissented in the same direction on monetary policy. This is interpreted as a sign that hawkish voices advocating for concrete Fed action to rein in inflation are growing louder than before.

The statement was almost identical to last month’s. The Fed assessed that “economic activity has been expanding at a solid pace, despite elevated uncertainty partly caused by conflict in the Middle East.” Productivity growth and capital investment remain strong, job gains are keeping pace with labor force growth, and the unemployment rate has shown little change.

The Fed determined that inflation remains elevated relative to its 2% target. It specifically noted that supply shocks—especially in certain segments such as energy—are driving up prices. As in the previous month, the Fed concluded its statement by affirming, “The Committee will achieve price stability.”

Wash: “It’s a period for close review, not just watchful waiting”

During the press briefing, Fed Chairman Kevin Wash rejected the characterization of the hold as a mere “pause.” He described the current environment as “not a period of watchful waiting, but rather one of watchful thinking.”

Chairman Wash stressed that policy should not be judged solely by the decision to hold the benchmark rate, given that interest rates in financial markets have already risen and are acting as a tightening force.

When asked whether the recently released June Consumer Price Index (CPI), which came in lower than expected, had a substantial impact on the decision to hold, he responded, “Not particularly.” He added, “We don’t use any single indicator as a pretext or justification. What matters is the trend in the data.”

Chairman Wash also reiterated that inflation has been running above the target for over five years. He addressed the perception that the Fed might tolerate inflation slightly above 2%: “Price stability as defined by the Committee is 2%, and we will achieve it.”

He left open the possibility of future rate hikes: “If inflation remains high within our forecast horizon, interest rates could be part of the solution. We will not hesitate to act if necessary and appropriate.”

AI Investment Boom: Both a Growth Engine and an Inflationary Wild Card

Chairman Wash cited the expansion of corporate investment as the most notable feature of the U.S. economy. Investments in advanced equipment and software related to artificial intelligence (AI) have surged by around 20% over the past four quarters, supporting manufacturing output and economic growth.

However, he noted that the AI investment boom is complicating Fed policy judgments. Large-scale investments in data centers and computing facilities can boost productivity and expand the economy’s supply capacity, but in the short-term, they may also drive up prices for memory and logic semiconductors and related AI infrastructure.

He stated, “The boom in corporate capital investment is raising prices for memory chips, logic semiconductors, and associated AI infrastructure. We need to determine whether these price changes are part of broad-based inflation, or instead are phenomena limited to specific, noticeable sectors.”

This FOMC meeting also included in-depth discussions on the effects of a series of recent shocks—post-pandemic supply chain disruptions, military conflicts, energy supply interruptions, tariff hikes, and the rapid increase in AI investments—on prices, growth, and employment.

He emphasized that supply shocks should not be dismissed as merely temporary events. Chairman Wash said, “We are striving to understand whether these shocks are spreading into economy-wide prices. It is true that such shocks make policy judgment more difficult.”

The Market Eyes a Possible September Rate Hike

The market is focusing on the fact that support within the Fed for rate hikes was stronger than expected. While the pressure for a July increase has eased somewhat following a moderate CPI reading, renewed conflict in the Middle East has driven energy prices higher, amplifying uncertainties surrounding the inflation trajectory.

In last month’s economic outlook, the Fed forecasted that a 0.25 percentage point rate hike could be necessary by the end of the year. While Fed Governor Christopher Waller recently warned that higher rates could be needed if inflation does not improve sufficiently, he voted in favor of holding at this meeting.

The next FOMC meeting will be held on September 15–16. Since two sets of inflation data are scheduled for release before then, inflation trends over the next two months will be key in determining whether rates are increased.

When asked about the market’s nearly 100% pricing in of a September hike, Chairman Wash replied, “We are not bound by market prices. The market is a useful source of information, but it is neither definitive nor perfect.”

Although the Fed once again held rates steady, with three dissenters voting for an increase and Chairman Wash’s commitment to price stability, some observers believe the focus of policy discussions has already shifted further toward additional tightening.

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