The Federal Reserve is expected to hold interest rates steady at 3.5 to 3.75 percent, the second straight meeting where new Chair Kevin Warsh resisted pressure to hike, Reuters reports. The decision sounded reasonable in a press release. It sounds a lot different at the pump.
Gas is averaging $4.10 a gallon nationally right now, up 23 cents from a month ago. Inflation ran at 4.2 percent in May, the highest level in three years, before dipping to 3.5 percent in June when a brief ceasefire with Iran brought energy prices down for a few weeks. Then Trump declared the ceasefire over in early July, strikes resumed, and oil climbed back. The June relief is already fading.
This is the world Warsh is trying to navigate. He took over as Fed chair in May and is running his second rate-setting meeting with no clear runway ahead of him.
The inflation picture was complicated enough before the war with Iran entered its fifth month. Add ongoing airstrikes, a renewed Iranian missile campaign, and the accompanying oil price swings, and you have a central bank trying to steer by a compass that keeps spinning.
What makes this moment particularly revealing is what Warsh has done to the Fed’s communication style. He came in and ripped out the forward guidance, the carefully worded signals to markets about what the Fed might do in the future. The June policy statement was notably shorter.
Last month, the Committee moved to maintain the target range for the federal funds rate at 3.5%-3.75% in a 12-0 vote.
“Economic activity is expanding at a solid pace despite elevated uncertainty that owes, in part, to the conflict in the Middle East. Productivity growth and capital investment are strong. Job gains have kept pace with the workforce, and the unemployment rate has changed little,” the Federal Open Market Committee said in a statement. “Inflation remains elevated relative to the Committee’s 2 percent goal, in part reflecting supply shocks that have driven price increases in certain sectors, including energy. The Committee will deliver price stability.”
