Fed Divided Over Decision To Keep Rates On Hold As Markets Tumble

The Federal Reserve voted Wednesday to keep interest rates steady in a fractured decision that showed growing support within the central bank for a rate hike to fight elevated inflation.

Three officials — Cleveland Fed President Beth Hammack, Minneapolis Fed President Neel Kashkari and Dallas Fed President Lorie Logan — dissented from the move, arguing that the central bank should have raised borrowing costs instead by a quarter of a percentage point.

It was the first time in almost a decade — when Janet Yellen was Fed chair — that three dissenters agreed that the Fed should have made a different rate decision.

The 9-3 vote is a reprieve for President Donald Trump from the prospect of higher rates, though it's not clear how long it will last. Markets are giving heavy odds that there will be at least one rate hike this year, and other colleagues of Warsh's have indicated the Fed will have to act soon if inflation doesn't show sustained improvement.

The Fed chief, during his press conference following the meeting, said he welcomed the debate.

“It was a real family fight,” Warsh said. “That’s the better way to get policy right.”

“Most of our [discussions] were on the big questions that mattered,” he added.

The markets were not reassured.

In reaction to the rate decision and press conference, yields on 30-year government debt rose to their highest level in nearly two decades, suggesting investors may be nervous about the Fed’s commitment to keeping inflation under control. If prices are allowed to rise faster without action by the central bank, it could require rates to go even higher later in order to tame inflation. Stocks also slid.

The latest flare-up of the fighting in Iran, along with the imposition of new global tariffs, the feverish investment in AI data centers, and resilient consumer spending, have fueled a conviction in the markets and within the Fed that the central bank will need to stem price gains.

For his part, Warsh has firmly declared his commitment to stable prices but offered no clarity on how willing he will be to raise borrowing costs even as the president who just appointed him calls for rate cuts. He indicated Wednesday that rate hikes were a possibility, but only obliquely.

“Any central banker, especially a central banker where the labor markets are more or less at equilibrium, any central banker, when he or she sees underlying inflation moving higher, he or she is more inclined to tighten policy,” he said.

The rate-setting committee's post-meeting statement, which was dramatically shortened at its last meeting — Warsh's first as Fed chair — was essentially unchanged Wednesday. The Fed's policy rate remains set between 3.5 percent and 3.75 percent.