Kevin Warsh's first decision as Federal Reserve Chair, appointed by President Donald Trump, was to maintain the current interest rate. This decision is seen as a response to high inflation levels and elevated global energy prices due to the ongoing conflict with 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, 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 by 0.3%, according to CNBC. The network also reported that nine of the 18 Fed officials expect an interest rate hike later this year.
Market expectations leaned toward Warsh maintaining the current rate. USA Today noted on June 15 that while President Trump had called for rate cuts, inflation was above target, and Warsh faced scrutiny regarding the Fed's political independence, leading to predictions that he would keep rates steady.
Typically, the Fed lowers rates when concerns about the labor market grow, aiming to reduce borrowing costs and stimulate the economy. Conversely, rates are raised to curb spending and inflation when prices rise. The Fed may also choose to hold rates steady when it believes the current levels are appropriate or when more data is needed for analysis.
Bill Adams, chief economist at Comerica Bank, told USA Today that for the Fed to justify a rate cut, it would need to consider negative impacts on the labor market from factors like AI-induced job losses or geopolitical tensions in the Middle East. He added that without such circumstances, it would be difficult for the Fed to rationalize a rate decrease at this time.
Reports indicate that Warsh, who served on the Fed Board from 2006 to 2011, was known as a hawk focused on curbing inflation through rate hikes. However, since his nomination as chair, he has expressed the need for lower borrowing costs, acknowledging potential deflationary pressures from AI-driven productivity gains. The Wall Street Journal pointed out that while Warsh hinted at rate cuts after his nomination, he now faces a challenging environment for such moves, with discussions within the Fed leaning more toward rate increases.
Underlying this situation is inflation. The Journal noted that while AI was initially expected to boost productivity and suppress inflation, rising semiconductor prices and increased construction costs for power and data centers have led to economic booms. Additionally, soaring prices in the tech sector are contributing to inflation, as investors who profited from stocks are increasing their spending. The ongoing conflict between the U.S. and Iran has also driven up gasoline and commodity prices globally. The newspaper remarked that while a potential agreement to reopen the Strait of Hormuz could ease inflationary pressures, the pace of relief would be slow, suggesting that the post-war economy would be markedly different from before.
This news is not welcome for President Trump, who has been eagerly advocating for rate cuts. Last month, he urged Warsh to focus on his responsibilities independently, saying, "Don’t look at me or anyone else; do your job well."
* This article has been translated by AI.
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