Fed holds rates at 3.5% as 9 officials signal a hike

The Federal Reserve held its benchmark interest rate at 3.5% to 3.75% on Wednesday but signaled it will likely raise rates before year-end, as nine of 18 Federal Open Market Committee members projected at least a quarter-point increase to combat inflation that has run stubbornly above target.

"Persistently high prices are a burden for the American people, but the recent past need not be prologue," Chair Kevin Warsh said in his first press conference since taking office. "Members of the FOMC are unambiguous and unanimous: This committee will deliver price stability."

The hawkish hold sent stocks lower and pushed bond yields higher. The S&P 500 fell 1.2%, or 91 points, while the Nasdaq composite lost 1.3%, or more than 350 points. The Dow Jones Industrial Average gave back about 507 points, or 1%. The 10-year U.S. Treasury note yield rose roughly 5 basis points to about 4.498%, while the VIX volatility index spiked 13%. In currency markets, the U.S. dollar strengthened broadly, pushing the pound sterling down nearly 1% to $1.3300.

The decision marks a significant shift in the Fed's posture after three quarter-point cuts in 2025. The fed funds rate has been unchanged since December, when the last reduction brought it to the current range. Financial markets now price an 85% probability of at least one rate increase by year-end, up from about 60% the day before the decision, according to CME Group's FedWatch tool. The last time the Fed used similarly decisive language on price stability was in 2022, when it preceded a series of 75-basis-point hikes that ultimately pushed the fed funds rate to a two-decade high.

Inflation Outlook Worsens

The FOMC's quarterly Summary of Economic Projections showed officials now expect PCE inflation to average 3.6% at year-end, up nearly a full percentage point from the March forecast. The Fed's preferred inflation gauge has run above the 2% target for 62 consecutive months, driven in part by energy cost increases tied to the Iran conflict. Consumer prices rose 4.2% in May from a year earlier, the Labor Department reported, marking another three-year high.

Warsh announced the creation of five task forces to examine the Fed's communication strategy, balance sheet, data sources, inflation framework, and productivity and jobs. He said he will appoint both internal and external members, with recommendations expected by the fall. The statement explaining the rate decision was shortened to 130 words from 341 words in April, and notably removed any reference to an easing bias — language that had signaled the Fed's inclination to cut rates.

What's at Stake for Consumers

A rate hike would raise borrowing costs across the economy. The fed funds rate influences the prime rate that banks charge their best customers, which in turn affects credit cards, personal loans, and adjustable-rate mortgages. Mortgage rates have already moved higher, with the 30-year fixed rate tracking the 10-year Treasury yield's recent rise. Warsh acknowledged that policy is "restrictive" in the housing market, where elevated mortgage rates have suppressed home sales, but said he would "have a hard time assigning that description to the financial markets," where stocks have pushed near record highs.

The Fed's next policy meeting is scheduled for July 28-29. Warsh declined to offer forward guidance on the rate path, telling reporters he would not submit his own projections to the Summary of Economic Projections. President Donald Trump, who had called for lower rates under former Chair Jerome Powell, shrugged off the decision, saying, "It's all right. Whatever."

This article is for informational purposes only and does not constitute investment advice.