Kevin Warsh's first decision as the new chair of the Federal Reserve, appointed by President Donald Trump, was to keep interest rates unchanged. 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 Reserve's Federal Open Market Committee (FOMC) unanimously decided to maintain the current interest rate range of 3.5% to 3.75%. This marks the fourth consecutive month of holding rates steady, following reductions of 0.25 percentage points in September, October, and December of the previous 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 fell 0.7%, and the Dow Jones Industrial Average dropped 0.3%, according to CNBC. The network also reported that nine out of the 18 Fed officials expect an interest 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, "President Trump has called for rate cuts, but with inflation exceeding target levels, Warsh faces scrutiny regarding the Fed's political independence," predicting that he would 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. Rates may also be held steady when the Fed believes current levels are appropriate or when more data is needed for 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-induced 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 while also acknowledging potential deflationary pressures from AI-driven productivity gains. The Wall Street Journal noted that while Warsh hinted at the possibility of rate cuts after his nomination, he now faces a challenging environment for such actions, with discussions within the Fed leaning more toward rate increases than cuts.
Underlying this situation is inflation. The 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 have contributed to economic growth. Additionally, soaring prices in the tech sector have fueled inflation, leading investors who profited in stocks to increase their spending. Furthermore, the conflict between the U.S. and Iran has driven up gasoline and commodity prices globally. The newspaper stated, "While an agreement to reopen the Strait of Hormuz may alleviate inflationary pressures, the pace of relief will be slow," adding that the post-war economy will be fundamentally 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 and be an independent chair."
* This article has been translated by AI.
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