The US Federal Reserve has kept its benchmark lending rate unchanged at 3.5%–3.75% as inflation remains above its 2% target. Markets will now closely watch the Fed’s September policy meeting for the next move on rates.
Highlights
- US Federal Reserve keeps interest rates unchanged at 3.5%–3.75%.
- The decision was approved by a 9-3 vote.
- Three Fed officials supported an interest rate increase.
- Inflation continues to remain above the central bank’s 2% target.
- Middle East tensions and rising energy prices remain major risks.
- Markets will focus on inflation, jobs and consumer spending data before September.
The US Federal Reserve has kept its benchmark lending rate unchanged in the range of 3.5% to 3.75%, in line with market expectations. The central bank said it would wait for clearer evidence that inflation is moving sustainably towards its 2% target before changing monetary policy.
The decision was approved by a 9-3 vote. Three regional Federal Reserve presidents—Beth Hammack of Cleveland, Neel Kashkari of Minneapolis and Lorie Logan of Dallas—supported an increase in interest rates.
They argued that borrowing costs should remain higher to control inflation, which has stayed above the Federal Reserve’s 2% target for more than five years.
The Federal Reserve said economic activity continued to expand at a strong pace despite uncertainty caused by the conflict in the Middle East. Productivity and capital investment remain strong, while employment growth is broadly in line with the expansion of the workforce.
The unemployment rate has also seen little change. However, the central bank said inflation is still elevated due partly to supply shocks that have increased prices in sectors such as energy.
The Fed has decided to wait for more evidence before making any change to the federal funds rate. Policymakers want to ensure that inflation is steadily declining towards the target instead of reacting to temporary improvements in price data.
Before the meeting, investors had estimated a 35% chance of a 25-basis-point rate cut. Recent inflation figures were softer than expected, giving Fed officials more time to assess upcoming economic data.
However, economists have warned that the easing in inflationary pressures may be temporary. A recent rise in crude oil prices amid Middle East tensions could push energy and transportation costs higher again.
Attention will now turn to the Federal Reserve’s next policy meeting in September. Markets will closely track inflation, labour-market conditions, consumer spending and economic growth data to understand whether the central bank may raise, cut or continue holding rates.
