Federal Reserve Chair Kevin Warsh holds a press conference Wednesday (local time). [AFP]
Federal Reserve Chair Kevin Warsh holds a press conference Wednesday (local time). [AFP]

The Federal Reserve held its benchmark interest rate steady, but three FOMC members dissented in favor of a hike — a split that markets interpreted as a hawkish hold, adding weight to the possibility of further tightening before year's end.

The Fed kept its benchmark interest rate at 3.50–3.75 percent on Wednesday (local time). A hold had been the consensus expectation, but the degree of internal dissent came in stronger than anticipated.

Wall Street noted that a 0.4 percent month-on-month drop in the US Consumer Price Index for June — driven by lower global oil prices — had bought the Fed time to defer a policy decision.

However, the resumption of armed conflict between the United States and Iran this month, combined with rising tensions along the Strait of Hormuz and Red Sea shipping lanes, has sent oil prices sharply higher and rekindled inflation concerns.

Those fears had led financial markets to price in some chance of a surprise rate hike at this meeting. According to CME FedWatch, fed funds futures reflected roughly a one-in-three probability of a rate increase right up until the decision was announced.

Ultimately no hike materialized, but the meeting confirmed that a meaningful faction within the FOMC was actively pushing for one.

Beth Hammack, president of the Cleveland Fed; Neel Kashkari, president of the Minneapolis Fed; and Lorie Logan, president of the Dallas Fed, all voted against the hold, calling for a 25-basis-point increase.

The same three officials had also dissented at the April FOMC meeting, objecting to language in the policy statement that retained the accommodative phrase "further adjustments." They did not dissent at the June meeting, however, when the hold was decided unanimously.

The Fed's assessment of the US economy was largely unchanged. Aside from the notation that three members including Hammack had voted for a rate increase, the language describing economic conditions in Wednesday's policy statement was nearly identical to the June statement.

Some on Wall Street had speculated the Fed might use this statement to hint at the possibility of future rate increases, but the July statement, like the June one, contained no forward-guidance language signaling the direction of future policy.

The FOMC repeated its June language verbatim, stating that "inflation remains above the 2 percent target, partly reflecting supply shocks that have driven up prices in some sectors, including energy," and that "the Committee will achieve price stability."

The omission reflects Chair Kevin Warsh's stated intention to minimize precommitment on the policy path.

Fed officials have nonetheless indicated they expect one rate increase this year. In the dot plot released with their June economic projections, the median forecast pointed to a single hike before year's end.

Markets now see a September move as the most likely vehicle for that increase. According to CME FedWatch, fed funds futures priced in roughly a 72 percent probability of a Fed rate hike in September immediately after Wednesday's decision was announced.


mokiya@heraldcorp.com