Federal Reserve officials left interest rates unchanged for the fifth consecutive meeting. The Committee voted 9-3 to hold the benchmark federal funds rate in a range of 3.50% – 3.75%. Again, the Committee provided minimal forward guidance. The Investment Committee was not surprised by today’s decision to leave policy unchanged. The economic outlook remains murky, although earnings and the labor market continue to show signs of strength; inflation expectations remain the bigger concern for policymakers. As such, the FOMC remains split on the appropriate path for interest rates, with some officials forecasting at least one 25 basis point rate hike and others expecting to hold policy steady or ease.
Following a disinflationary trend in June for both the Consumer Price Index and Producer Price Index inflation, concerns about renewed price pressures have resurfaced. Heightened geopolitical tensions have pushed energy prices higher, reversing much of June’s decline. After falling nearly 17% in June, oil prices have rebounded in July. As a result, we expect July inflation data to reflect a modest reacceleration, reinforcing the view that inflation may prove more persistent than previously anticipated.
For the Fed, the relative improvement in inflation in June supported a dovish argument that price pressures were cooling and could retreat further into year-end as the lingering impact from tariffs falls off and energy prices normalize further. However, with the conflict ramping back up overseas and creating a renewed threat of potential upside risk to prices, the pendulum has now shifted back into a more hawkish camp. As such, with increased uncertainty and volatility, policy is likely to remain steady for some time longer as the Fed continues to assess the evolution of events and the impact on inflation and the broader economy in the months to come. Fed funds futures contracts are pricing in a 25 basis point increase at the September meeting.