WASHINGTON -- Federal Reserve officials held interest rates steady Wednesday over the objections of three bank presidents who wanted an increase, underscoring how pressure is building inside the central bank to act on inflation that has run above its target for five years.
The Fed held its benchmark rate steady, in a range of 3.5% to 3.75%, in a 9-3 vote. The rate-setting panel issued the same policy statement as it did in June, when it also held rates steady. The decision left Chairman Kevin Warsh's vow to end the run of above-target inflation to rest for a second straight meeting on words rather than action.
The three Fed presidents who voted for a quarter-point rate hike -- Beth Hammack of Cleveland, Neel Kashkari of Minneapolis, and Lorie Logan of Dallas -- had opposed in April the decision to issue a statement that suggested a rate cut was more likely than an increase. It was the first time since 2016 that three officials dissented in the same direction over a policy change.
At last month's meeting, around half of officials thought a rate increase would be warranted later this year. Inflation data released two weeks ago had been mild enough to ease pressure on the Fed to raise rates at this meeting. But renewed fighting between the U.S. and Iran sent energy prices higher again last week.
The conflict has underscored officials' fraying patience with looking past another price shock on the heels of tariff-related increases last year and with robust demand stemming from the AI build-out.
For households, the message is that relief on borrowing costs is unlikely to arrive soon. The Fed's benchmark rate most directly affects short-term borrowing such as credit cards and auto loans. But the costs that matter most to many businesses and households, including mortgage rates, track longer-term Treasury yields, and those have been climbing. The 30-year mortgage rate reached 6.76% last week, the highest in nearly one year, according to a survey by the Mortgage Bankers Association released Wednesday.
That mix of a Fed on hold and long-term rates rising reflects how far the inflation fight has moved from where officials expected it to be by now.
Three years ago, officials ended a sprint to lift rates to a two-decade high to combat much higher inflation. It began cutting them two years ago as inflation moved closer to its 2% target, paused early last year as tariffs threatened to push inflation up, and then resumed reductions last fall as hiring slowed and officials moved to insure against a labor-market downturn.
The slump never arrived. In its place came price pressures from the Iran war and AI build-out. The Fed is left with a resilient economy and inflation stuck near 3% or higher, depending on the gauge.
The officials pressing for an increase have increasingly pointed to the AI boom -- hundreds of billions of dollars flowing into data centers and computing power -- as a source of demand the economy can't easily supply. Interest rates can do little about price increases from tariffs or oil, but they can restrain demand. And while higher rates might not deter spending on data centers, where the capital is largely committed, they can cool other parts of the economy enough to ease the strain on supply.
These officials worry the Fed is providing support the economy no longer needs. When they cut last year, they expected inflation to run just above 2%; higher inflation this year means the inflation-adjusted policy rate is looser than expected. These officials have pointed to stock markets near records and easy corporate borrowing as evidence the economy could absorb higher rates without much difficulty.
The judgment is complicated because the Fed is confronting inflation its analytical apparatus wasn't built to explain. The models it relies on treat inflation as a broad-based phenomenon with the labor market at its center. Most officials have suggested that, for now, the labor market isn't the source of price pressures.
Those officials counseling patience say the pressures are a series of one-off shocks of the kind a central bank is supposed to look through, so long as households and businesses still expect inflation to subside. Their fear has been the opposite mistake: reacting to price changes that will have washed out of the data by the time higher rates take effect.
New York Fed President John Williams, the vice chair of the rate-setting committee, said earlier this month he expects inflation to edge down in coming quarters. He pointed to monthly readings of 0.2% or lower -- a pace that annualizes near the Fed's target -- as the test of whether underlying inflation is settling back to 2% as tariff effects wash out. Hotter readings would call for a policy response because it would suggest demand is outstripping supply rather than one-off costs working through prices.
Two inflation reports arrive before the Fed meets again on Sept. 15-16. "The bar for them to do something later this year is not that high," said Kurt Lewis, a former senior Fed adviser now at Piper Sandler. Lewis expects inflation to improve enough that they won't have to raise rates, though he said that path has narrowed. If the next two months show stiffer price pressures, "I have every belief that they would go," he said.
Some economists said the Fed's prevailing view understates the risk of waiting. The shocks of the past two years aren't discrete events the Fed can wait out, said Daleep Singh, a former New York Fed executive. "We're dealing with a series of related and compounding impairments that are each inflationary," said Singh, who is now chief global economist at PGIM Fixed Income.
He said the Fed should stop counting on inflation to drift lower on its own, and that hiring strong enough to keep unemployment from rising gives it an unusual opening to tighten without the job losses that usually follow. The longer it waits, Singh said, the higher rates would eventually have to go.
Rate hikes -- before or after this fall's midterm elections -- could reanimate a conflict with the Trump administration that cooled after Warsh became chairman in May.
The White House has said Warsh doesn't want to have to raise rates and is being pressed toward hikes by a hostile board. President Trump, who spent much of the past year demanding lower rates, selected Warsh six months ago to replace outgoing chair Jerome Powell after saying he wouldn't consider anyone who saw stronger growth as something to fear.
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