NEW YORK, July 29 (Reuters) – The Federal Reserve held interest rates steady on Wednesday, a choice that may intensify questions about how U.S. central bank chief Kevin Warsh will deliver on his commitment to bring inflation back down to the 2% target.
The decision to leave the benchmark interest rate in the 3.50%-3.75% range drew dissents from three of the 12 members of the policy-setting Federal Open Market Committee who “preferred” a quarter-percentage-point hike at this meeting.
MARKET REACTION:
STOCKS: The S&P 500 pared declines and was last down 0.24%.
BONDS: The yield on benchmark U.S. 10-year notes was last up 3.9 basis points to 4.643%.
FOREX: The dollar index fell and was last down 0.49% to 100.92.
COMMENTS:
ADAM SARHAN, CHIEF EXECUTIVE, 50 PARK INVESTMENTS, NEW YORK:
“The market’s breathing a collective sigh of relief that the Fed did not raise rates. There was a fear built in that the Fed would raise rates and choke the economy. That did not happen. So this is considered an easy money decision. They didn’t actually cut, but it’s as close to cutting rates as possible.
“Remember markets are driven a lot by fear and emotions… By not raising, that, in and of itself, alleviated a lot of pressure.”
TIM HOLLAND, CIO, ORION ADVISOR SOLUTIONS, OMAHA, NE:
“As expected, the Federal Reserve left rates unchanged at its July meeting, holding the Fed Funds Rate between 3.50% and 3.75% and, maybe, as also expected, it wasn’t a unanimous vote to do so, with several members of the FOMC voting to raise rates a quarter of a percentage point — the final vote was 9 to keep rates where they are, and 3 to raise.
“We aren’t that concerned about the divided vote, for us the more important outcome was interest rates going sideways until our central bank — and the rest of us — can determine if the war in the Middle East and the recent spike in oil prices will lead to higher inflation and higher inflation expectations, or if recent price pressures will prove transitory. We think the Fed was right to sit tight at its July meeting, and its decision will have no impact on how we are allocating our clients’ capital – we continue to believe strong economic fundamentals justify a cautiously optimistic outlook on US equities.
“The Fed meets again in mid-September, and six weeks is a lifetime as it concerns geo-political risk and its impact on monetary policy. All eyes — including ours — should remain on the Middle East and the price of oil between now and then.”
STEVE KOLANO, CHIEF INVESTMENT OFFICER, INTEGRATED PARTNERS, WALTHAM, MA:
“As we expected, the Fed left rates unchanged. The biggest change seems to be a growing number of dissenters from the last vote with now a few more voting members in favor of hiking rates. Warsh commentary will be key to deciphering any additional color, but our take is that it is important to remember Kevin Warsh is very much a supply-side economist. As such, to the extent energy prices are keeping a floor under inflation, raising rates impacts demand, not the supply of oil. Therefore, the base case continues to be ‘wait and see’ as it relates to data on core inflation going forward.
“Additionally, the fact that the five task forces will report preliminary findings in September and final findings in December, I think, gives Kevin Warsh some degree of near-term air cover to keep rates where they are until the task force reports are released, barring an exogenous event before the end of the year.”
MICHAEL ROSEN, CHIEF INVESTMENT OFFICER, ANGELES INVESTMENTS, SANTA MONICA, CA:
“The decision to hold rates steady was expected, but there were some meaningful bets on a rate hike, and unwinding those shorts led to a rally in the short end of the yield curve. Likewise, the long end of the curve is selling off as inflation concerns remain. The lack of a hike is also helping to push the dollar lower and equities a bit higher.
“All-in-all, these are marginal moves as the decision to hold rates steady was largely expected. Warsh will hold a news conference where his remarks will be scrutinized for any future bias in setting monetary policy. The market is clearly expecting a rate hike in September. It begs the question, if the Fed will likely hike in September, why not hike now for maximum impact? Are conditions likely to change materially in two months?”
RYAN DETRICK, CHIEF MARKET STRATEGIST, CARSON GROUP, OMAHA:
“The Fed held pat, as expected. The bigger question now though becomes how much pressure will they have to hike in September? Inflation is running hot and with surging crude oil, the market expects the next hike to indeed be in September.”
“Let’s not forget though, we saw some improvement in last month’s inflation data. From shelter, to apparel, to car prices, all slowing. The Fed really is in a rough spot here.”
MARK HACKETT, CHIEF MARKET STRATEGIST, NATIONWIDE INVESTMENT MANAGEMENT GROUP, PHILADELPHIA:
“The dissents may reflect a new-ish paradigm of independence of the members and lack of a united front, but the market is experiencing a relief rally after the Citadel note (which called for a rate hike). Still, until the press conference, it is unwise to make any determinative conclusions.”
TOM PORCELLI, CHIEF ECONOMIST, WELLS FARGO, NEW YORK:
“I think holding was the right call today. The Fed needs to have more patience as it relates to the inflation dynamic in the United States, particularly in the context of this is the kind of inflation- supply-side inflation, supply shock inflation that the Fed really has very limited ability to actually control. So I think patience in that regard is warranted at that point. I would actually argue it’s prudent.
“We think the Fed is supposed to be on hold for the rest of the year. Now, again, what’s going to dictate that is the inflation picture. If inflation picks up from here, then I think we’ll open up the door for the Fed to hike. But if inflation moves sideways from here or even improves modestly, like we saw last month, core measures of inflation, by the way, then I think that gives the Fed the ability to take a pass. So I think we’re going to go basically sort of inflation report to inflation report. It’s unfortunate because I don’t think policy is supposed to be dictated that way. But I think that that’s how the market is going to latch on to what’s going to happen next.”
MATTHIAS SCHEIBER, HEAD OF THE MULTI-ASSET TEAM AT ALLSPRING GLOBAL INVESTMENTS, LONDON:
“While policy remains on hold, the FOMC continues to face a challenging balancing act between bringing inflation back to target levels and supporting economic activity.
“Since the previous meeting, inflation data have generally surprised to the downside, with weakness evident across a range of components, including transport and communication services. This has supported expectations that underlying inflationary pressures are gradually easing. The shift in geopolitical risk remains a key consideration and, while neither central bankers nor markets possess perfect foresight, the FOMC is likely to look through any near-term, supply-driven inflation pressures as transitory. Nevertheless, policymakers have remained reluctant to signal that the inflation fight is over, emphasizing the need for greater confidence that price stability is being restored sustainably.
“The FOMC continues to characterize policy as appropriate and appears comfortable remaining patient while assessing incoming data. That said, policymakers are likely to retain a degree of caution given that inflation remains above target and supply-side risks persist, as reflected by the three dissenting votes advocating for a 0.25% hike. By providing less certainty around the future policy path, investors may increasingly rely on incoming economic data to infer how the Fed will react.”
JP POWERS, CHIEF INVESTMENT OFFICER, RWA WEALTH PARTNERS, BOSTON:
“After the June inflation print showed some progress, this move was to be expected. But we did see some real chance of a hike building in the lead up to this meeting that was getting up to about around one-third of a chance, I would say by market expectations, which I’m not sure there really ever was that much of a chance.
“But each meeting we’re now building more uncertainty around it than the last. It looks like September now, maybe we’re building to that crescendo, but we’ll have to see how the data shakes out now over the interim. So we’ll get more info tomorrow and they’ll get another couple of prints here and be kind of on the hook for maybe September.
“But for me, looking at the two-year (Treasury yield) before this, backing up on a day where we have a war escalating, it really shows you how concerned the market is that we were potentially going to see rates moving higher today. So I was kind of surprised in the reaction that was happening throughout the day. And so maybe that’s a little bit of a correction on that and kind of balancing between the two, the rate hike potential along with kind of a de-risking that’s happening in the rest of the market right now.”
PETER CARDILLO, CHIEF MARKET ECONOMIST, SPARTAN CAPITAL SECURITIES, NEW YORK:
“It was a short statement, and it really didn’t change that very much from the previous statement. The new Fed chair made it quite clear that they’re not going to communicate as they have in the past. So, the press conference could reveal a little bit more than the statement.
“There were three members who were looking for a rate hike. So, this tells me that the Fed is going to continue to talk tough on inflation but if inflation doesn’t heat up from these levels, despite what we’re seeing in the energy markets, there may not be a rate hike this year.”
BRIAN JACOBSEN, CHIEF ECONOMIST, ANNEX WEALTH MANAGEMENT, MENOMONEE FALLS, WISCONSIN:
“It’s not too surprising that there were three dissents. They’ll have plenty of time and space to explain their views, but it is folly to hike rates in the face of a supply-shock-bout of inflation. Cooler heads prevailed, but they may get nervous if we don’t see core inflation make some progress by the September meeting.
“Right now it is premature to conclude the 2025 tariff shocks and the 2026 oil price shocks are things the Fed needs to do anything about. Killing the golden goose of a good labor market isn’t going to bring peace to the Middle East or reverse tariffs.”
CHARLIE WISE, SENIOR VICE PRESIDENT, RESEARCH AND CONSULTING, TRANSUNION, CHICAGO:
“Today’s decision by the Federal Open Market Committee decision to hold interest rates steady comes amid a complex economic backdrop, with mixed signals from inflation, employment, consumer spending and broader economic growth.
“With rates unchanged, many of the trends that have characterized the consumer credit market in recent months are likely to continue. Measured growth in credit originations, coupled with disciplined risk management practices by lenders, would likely remain the prevailing theme in the near term. Stable interest rates may also provide consumers with greater confidence to move forward with borrowing decisions, particularly to finance larger purchases like homes and autos, that had been postponed amid uncertainty.”
CHRISTOPHER HODGE, CHIEF U.S. ECONOMIST, NATIXIS, NEW YORK:
“Holding rates is the appropriate move in our view. We are cautiously optimistic about the inflation path and absent a data trigger, there is no harm in buying time until at least September. The latest inflation prints and labor data have afforded the Fed some breathing room and no credibility will be sacrificed by waiting for more definitive signals. Hiking would have only confused what the Fed’s reaction function actually is and would have risked sending an overly hawkish signal.
“We expect (Fed Chairman) Warsh to remain vigilant about inflation but to acknowledge that the recent subdued inflation prints could indicate the possibility that the current stance of policy is appropriate, which is also our view. If that is not the case, the Fed stands ready to stamp out any price pressures.”
(Compiled by the Global Finance & Markets Breaking News team)
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