US stock markets dropped on Wednesday afternoon after the Federal Reserve left interest rates unchanged and signaled a possible rate hike before the end of the year.
The Fed was widely expected to keep rates at a range of 3.5% to 3.75%, where they have remained since December. The decision was unanimously supported by the Fed’s voting committee.
“Economic activity is expanding at a solid pace despite elevated uncertainty that owes, in part, to the conflict in the Middle East,” the Fed’s open market committee said in the statement.
The Dow closed 500 points lower, and the S&P 500 and Nasdaq down over 1.2% each, soon after the announcement.
This was the first meeting overseen by Kevin Warsh, who took over as Fed chair in May and has implied he wants to tighten the Fed’s public communications on future guidance.
The committee’s monthly policy statement was notably shorter compared with previous statements. It acknowledged that “inflation remains elevated relative to the committee’s 2% goal, in part reflecting supply shocks that have driven price increases in certain sectors, including energy” and said the central bank “will deliver price stability”.
The Fed also released a slate of projections illustrating when individual officials predict rate changes will occur. Nine members projected at least one rate increase this year. Warsh confirmed he was the sole board member who did not contribute to the projections.
The projections mark a U-turn in outlook from just a few months ago: the last time the Fed released projections, in March, 12 of the 19 officials projected at least one rate cut by the end of this year.
In his first press conference as chair, Warsh announced plans to overhaul the central bank, particularly its public communications. Warsh said he would create five new taskforces that will assess the “broad conduct of monetary policy”, including communications, the Fed’s balance sheet, data, productivity and jobs.
The groups will “examine current practice, consider alternatives, and ultimately propose next steps for policy-maker consideration”, with Warsh noting that he would enlist “some of the very best minds, both inside and outside the economics profession” for the groups.
One of the taskforces will reassess how the Fed communicates with the public more broadly, including the Fed’s news conferences, dot-graph projections and meeting transcripts and minutes.
“I don’t want to prejudge the outcomes but I’m open-minded about what they could be,” he said.
Warsh also emphasized his belief that the Fed’s monetary policy ‘“cannot have a very significant effect on particularly prices”, an about-face from the economist who was better known for being a so-called “inflation hawk” during his time as a Fed governor from 2006 and 2011.
“The price of oil in the markets or the price of a dozen eggs does not have first-order consequences to what we’re doing,” he said. “But we have an important job there. And it’s to make sure that those changes in oil, or beef, or eggs or milk don’t broaden in the economy.”
Warsh begins his four-year term as chair at a time when the US economy has been rattled by heightened inflation and geopolitical uncertainty.
A sharp spike in energy prices caused by the war in the Middle East has pushed inflation to 4.2% – the highest level the US has seen since 2023 and far from the Fed’s 2% target. Though the announcement of a ceasefire deal between the US and Iran sent oil prices tumbling to a three-month low, it will probably take months for energy prices to return to prewar levels.
Meanwhile, hourly earnings dropped to a seasonally adjusted 0.7%, indicating that price increases have stripped out wage gains over the past year.
But it is unclear whether higher inflation will ever convince a majority of the Fed’s 12 voting members to call for a rate increase. Core inflation, which strips out volatile food and energy prices, has increased only mildly, to 2.9% from the year prior. The country’s labor market has also remained relatively strong, with the unemployment rate holding steady at 4.3%.
Even as Americans continue to balk at higher prices, Trump has continued to advocate for lower rates but said last week that he doesn’t “want to have a big influence” on Warsh.
“Kevin is fantastic, and I want him to do whatever he wants,” Trump said in an interview with Meet the Press on NBC News, while also reiterating his desire for a rate cut.
Before he was first nominated by Trump in January, Warsh argued for the importance of rate cuts – publicly agreeing with the president at a shaky time between the White House and the Fed. At Wednesday’s news conference, Warsh declined to answer whether he had met with Trump since starting his term.
Warsh is likely to receive more favorable treatment from the president compared with his predecessor, Jerome Powell, who Trump repeatedly harassed for holding off on rate cuts.
In January, Powell was put under a federal investigation over renovations at the Fed headquarters that went over budget, which the justice department dropped after political pressure. Powell said that the investigation was a “pretext” meant to pressure the central bank to lower rates.
When accepting the John F Kennedy Profile in Courage award earlier this month, Powell warned that politicizing the Fed could permanently damage trust in the central bank.
“The public would lose faith that the central bank will make decisions based only on what’s best for all Americans,” Powell said. “The Fed’s credibility would be lost.”
