Federal Reserve chair Kevin Warsh and his colleagues held interest rates steady Wednesday. The central bank is determined to curb stubborn inflation.
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Eric Lee/Getty Images North America
The Federal Reserve held its benchmark interest rate steady Wednesday, but left the door open to raising rates in the future if inflation remains elevated.
The central bank’s rate-setting committee voted 9 to 3 to leave its short-term borrowing rate in a range between 3.5 and 3.75%. The decision affects the cost of credit throughout the economy, including auto loans, business financing and credit cards.
“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,” policymakers said in a statement.
Three regional Fed bank presidents dissented from the decision, preferring to raise interest rates by a quarter percentage point.
This was the second rate-setting meeting led by Kevin Warsh, who took over as chairman of the central bank in May. Warsh told lawmakers this month that he and his colleagues are determined to restore price stability after five years of uncomfortably high inflation.
“My colleagues and I recognize that high inflation has been an undue burden on American households and businesses,” Warsh told the Senate Banking Committee. “The members of our committee have no tolerance for persistently elevated inflation.”
A spike in gasoline prices resulting from the U.S. war with Iran pushed the annual inflation rate to 4.2% in May, its highest level in more than three years.
Oil and gas prices have since moderated somewhat. But renewed fighting in and around the Strait of Hormuz this week raises concern that pump prices could remain high for months to come.
Higher interest rates tend to be a drag on the job market, while lower rates can boost hiring. Weakness in the job market prompted the Fed to cut interest rates three times last year. But this spring, the labor market appeared to rebound.
“America’s labor force appears to be broadly stable,” Warsh told lawmakers. “Job creation has kept pace with the workforce. The unemployment rate [is] quite low and has changed little, quite frankly, over the last year.”
AI is also becoming a factor for the Fed
One of the forces propping up the economy, and the stock market, is the huge investment that tech companies are making in artificial intelligence.
Warsh is generally bullish about the prospects for AI, believing it will eventually make workers more productive. But the growth of data centers is also putting upward pressure on the price of building materials and electricity and computer chips. And there’s considerable uncertainty about how AI will affect workers.
“Over the long term, my best guess is this will improve the real wages and will help us on full employment,” Warsh said at the Congressional hearing. “But between the short-term and the long-term, it can have a disruptive effect.”
Artificial intelligence is the focus of one of several task forces that Warsh established to advise the central bank. The task forces, which are led by economists and business people from outside the Fed, are expected to make recommendations by the end of this year.
