Federal Reserve leaves interest rates unchanged as Warsh era begins

Federal Reserve leaves interest rates unchanged as Warsh era begins

Warsh succeeded Jerome Powell in May to become the 17th chair of the Federal Reserve

By Eric Revell, FOXBusiness

The Federal Reserve on Wednesday announced that it will hold interest rates steady due to concerns about elevated inflation amid the war in Iran, as Fed Chair Kevin Warsh's tenure leading the central bank begins in earnest.

Fed policymakers voted 12-0 to leave the benchmark federal funds rate unchanged at its current range of 3.5% to 3.75%. The move follows the central bank's decision to hold rates steady in January, March and April following three successive 25-basis-point rate cuts in September, October and December to close out last year.

The Federal Open Market Committee (FOMC), the central bank's panel responsible for monetary policy moves, noted in its statement that inflation remains elevated above the central bank's 2% goal, which it said was "in part reflecting supply shocks that have driven price increases in certain sectors, including energy."

They also noted that job gains have kept pace with the workforce, while reiterating support for the dual mandate of price stability and maximum employment. Policymakers added that, "Economic activity is expanding at a solid pace despite elevated uncertainty that owes, in part, to the conflict in the Middle East."

The FOMC also released a summary of economic projections, also known as the dot plot, which showed that nine of the 18 voting members project an interest rate hike before the end of 2026, with six projecting two 25-basis-point hikes.

They see PCE inflation at 3.6% at year's end, up from 2.7% in the March projection, with the unemployment rate at 4.3%, slightly lower than the prior estimate of 4.4%. They also see economic growth slowing, with the projection showing real GDP up 2.2% at the end of the year - down from a 2.4% prediction in March.

Warsh spoke to the media at his first post-meeting press conference on behalf of the FOMC. Warsh's predecessor, Jerome Powell, remains a member of the Fed's Board of Governors and a voting member of the FOMC.

"We recognize that inflation has been running well ahead of the Fed's long-stated inflation goal of 2%. That's been going on for more than five years. Persistently high prices are a burden for the American people, but the recent past need not be prologue," Warsh said.

"I am pleased to report that members of the FOMC are unambiguous and unanimous - this committee will deliver price stability," he added.

He was also asked about whether the removal of forward guidance would impact the dot plot going forward. Warsh said he "noted that all the submissions were coming in with pencils, you know, the kind with the big erasers. That's to say, that I think my colleagues around the table, when they submitted their dots, understand the world is changing quite quickly, and they don't feel bound by them six weeks from now or six days from now."

"I didn't hear tons of conviction. What I heard was the kind of humility that I think we should have. I did not submit a dot, for me, it's not helpful in the conduct of policy," Warsh said. He added that he won't prejudge the Fed's review of its communications policy and is pretty open-minded about what they could be.

What experts are saying

Ellen Zentner, chief economic strategist for Morgan Stanley Wealth Management, said that, "The new Fed Chair delivered on the promise to limit communications about the future path of interest rates."

"The way forward at the Fed will be marked by structural changes as opposed to a change in rates. Despite a more-hawkish statement, we expect the Fed's next move is still likely a cut, but it will take time for inflation to unwind enough to give the board the breathing room to act," Zentner added.

Seema Shah, chief global strategist at Principal Asset Management, said that "Warsh may have reshaped the optics - dropping the dot and cutting the statement - but the substance of this FOMC is hawkish."

"With half the 18 dots signaling a hike this year, alongside higher inflation forecasts, the Fed may be just a few strong inflation and jobs releases away from tightening. Warsh is set to face an uphill struggle to convince the committee that policy easing is required - if he even still believes that himself," Shah said.