Kevin Warsh's first decision as the new chair of the Federal Reserve, appointed by President Donald Trump, was to maintain the current interest rate. This decision comes amid high inflation and elevated global energy prices due to the ongoing conflict in Iran.
On June 17, the Federal Open Market Committee (FOMC) unanimously voted to keep the benchmark interest rate at 3.5% to 3.75%. This marks the fourth consecutive freeze following similar decisions in January, March, and April of this year. The Fed had previously lowered the rate by 0.25 percentage points in September, October, and December of last year.
Following the announcement of the rate freeze, stock prices fell. As of 2:05 p.m. Eastern Time, the S&P 500 index was down 0.6%, the Nasdaq composite dropped 0.7%, and the Dow Jones Industrial Average fell 0.3%, according to CNBC. The report also indicated that nine of the 18 Fed members expect a rate hike later this year.
Market expectations had largely anticipated that Warsh would maintain the current interest rate. An article from USA Today on June 15 noted, "While President Trump has called for rate cuts, inflation remains above target, and Warsh faces scrutiny regarding the Fed's political independence," suggesting that he would likely keep rates steady.
Typically, the Fed lowers rates when concerns about the labor market increase, aiming to reduce borrowing costs and stimulate the economy. Conversely, when prices rise, the Fed raises rates to curb spending and control inflation. The Fed may also choose to hold rates steady when it deems the current rate or inflation levels appropriate or when it requires more data analysis.
Bill Adams, chief economist at Comerica Bank, told USA Today, "For the Fed to justify lowering rates, it would need to consider negative shocks to the labor market from AI-related job losses or geopolitical tensions in the Middle East. If such situations do not arise, it will be difficult for the Fed to justify a rate cut in the current environment."
Reports indicate that Warsh, who served on the Fed's board from 2006 to 2011, was known as a hawk focused on curbing inflation through rate increases. However, since his nomination as chair, he has expressed the need for lower borrowing costs and acknowledged potential deflationary pressures from AI-driven productivity gains. The Wall Street Journal noted that while Warsh had hinted at rate cuts after his nomination, he now faces a challenging environment for such moves, with discussions within the Fed leaning more towards rate increases than cuts.
Underlying this situation is inflation. The Wall Street Journal reported that while AI was initially expected to boost productivity and suppress inflation, rising semiconductor prices and increased construction costs for power and data centers are contributing to economic growth. Additionally, soaring tech stock prices are fueling inflation, as investors who have profited from the stock market are increasing their spending. Furthermore, the conflict between the U.S. and Iran has driven up gasoline and commodity prices worldwide. The newspaper stated, "While a deal to reopen the Strait of Hormuz may ease inflationary pressures, the pace of relief will be slow," adding that the post-war economy will be markedly different from before.
This news is not welcome for President Trump, who has been eagerly advocating for rate cuts. Last month, he advised Warsh, "Don’t look at me or anyone else; just do your job well," emphasizing the importance of an independent chair.
* This article has been translated by AI.
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