US Federal Reserve keeps interest rates stable – uncertainty remains

Business News

The US Federal Reserve under new boss Kevin Warsh is leaving interest rates at 3.5 to 3.75 percent. However, an interest rate increase in September remains an option.

As expected, the US Federal Reserve is leaving the key interest rate unchanged once again. The Central Bank Council voted nine to three in favor of another interest rate break. This means that the range remains at 3.5 to 3.75 percent for the fifth time in a row this year. An interest rate increase at the next decision in September remains possible. The Statement from the central bank is very similar to that of June, when interest rates were also not affected.

As the New York Times reports, it is the first time since 2016 that more than two Fed members voted against the course ultimately decided. The three dissenters spoke out in favor of raising interest rates by one step (25 basis points). The fact that the Fed committee does not vote unanimously is not unusual – but it shows how differently the current high level of inflation is weighted.

Fed’s hands are tied

The energy crisis and the Iran war left practically no other decision to be made: After the recent escalation in the Middle East, the price for a barrel (159 liters) of Brent crude oil rose above the $100 per barrel mark. It was only the recent break in US attacks at the weekend that caused the price to fall again.

While economists had practically ruled out a rate cut against this background, at most an interest rate hike would have been conceivable – albeit unlikely. This is linked to the hope of getting the inflation rate under control. In June this was 3.5 percent, still well above the Fed’s target of 2 percent. At the same time, employment development has recently fallen significantly short of expectations.

However, critics point out that an interest rate increase would not combat the main cause of inflation – because an end to the energy crisis is only foreseeable if there is a permanent solution to the tricky situation in the Strait of Hormuz. The strait is of immense importance for global energy trade. Due to the current tight supply, companies have to spend a lot more money on oil, gas and fertilizer. A premature interest rate increase could seem hasty, while keeping the key interest rate the same gives the central bank more time for further indicators.

Warsh prioritizes fighting inflation

The new Fed chief had previously appeared combative in view of the comparatively high inflation rate. “The members of our committee will not tolerate persistently high inflation,” he said in mid-July. Warsh is considered an “inflation hawk” and tends to adopt a more restrictive monetary policy to combat inflation. Warsh had also announced a special unit that would investigate the “causes” of inflation.

At the last interest rate decision in June, the Fed had at least not expected a rapid decline in inflation for the current year. It expects an inflation rate of 3.6 percent for 2026, which is significantly higher than expected shortly after the start of the Iran war. The Fed forecasts then call for 2.3 percent in 2027. That would at least open up more space for discussions about a looser monetary policy stance.

Will there still be any movement in 2026?

The central bank now appears to be more open to tighter monetary policy: in June, 9 of the 18 Fed members surveyed expected at least a one-step increase (25 basis points) this year. Of these, six can imagine even more far-reaching streamlining. Eight other members, however, expect a break in interest rates for the year as a whole. Only one member expects interest rates to fall.

The projections are assessments of the seven-member Fed board and the twelve regional bank presidents with regard to the development of economic growth, inflation and interest rate policy. Back in March, no one expected a tighter monetary policy. Observers are currently expecting a rate hike in September.

Fear of political influence

The Fed should decide on the key interest rate independently of politics and thus find a compromise between inflation and full employment. The problem: If the central bank loosens interest rates, it is likely to further fuel inflation – something it wants to avoid.

Economists fear that Trump, through Warsh, could have considerable influence on such decisions and indirectly force a looser monetary policy. The actually independent interest rate decisions could be politically distorted and investors’ trust in the Fed could be eroded.

Contrary to how Trump likes to portray it in a nutshell, Warsh, as chairman, does not make decisions alone. Instead, the Central Bank Council votes at regular intervals on the further course of monetary policy.

ECB took a break after the increase

The European Central Bank (ECB) recently left its interest rates unchanged despite the ongoing threat of inflation. After the first increase in almost three years in June, it decided to leave the deposit rate, which is important for banks and savers in the euro area, at 2.25 percent. A further hike could follow in September when the ECB has new forecasts on inflation and the economy. (sda/awp)

(awp/sda/con)