Markets pulled back in the leadup to the announcement as oil prices rose
The United States Federal Reserve (Fed) elected to hold its interest rate steady between 3.5 and 3.75 per cent on Wednesday, following the second meeting of the Federal Open Markets Committee (FOMC) with Kevin Warsh as Fed Chairman.
"Economic activity is expanding at a solid pace despite elevated uncertainty that owes, in part, to the conflict in the Middle East. Productivity growth and capital investment are strong. Job gains have kept pace with the workforce, and the unemployment rate has changed little," a press release announcing the decision reads. "Inflation remains elevated relative to the Committee's 2 percent goal, in part reflecting supply shocks that have driven price increases in certain sectors, including energy. The Committee will deliver price stability."
The decision was largely expected by bond markets and economists, with the United States facing persistently high inflation tied, in large part, to rising oil prices as a result of ongoing conflict with Iran.
The FOMC decision was not unanimous as Governors Hammack, Kashkari, and Logan voted in favour of a 25 basis point hike.
Personal consumption expenditures (PCE) inflation, a preferred inflation gague by the Fed, reached a three-year high of 4.1 per cent in May. Core PCE was 3.4 per cent for the month. The Fed's target is two per cent. However, a statistical revamp at the Bureau of Economic Analysis may see those metrics drop by around 0.2 per cent, according to the Financial Times. June PCE data had also softened somewhat, potentially giving the Fed additional leeway in its decision.
Those inflationary concerns were heightened in the lead up to the decision, with Brent crude rising over 15 per cent over the month of July, reflecting the ratcheting up of tensions between the United States and Iran in recent weeks. Iran retains control of the Strait of Hormuz, a crucial passageway for oil, gas, fertilizer, and other hydrocarbons from energy producing countries along the Persian Gulf.
Stocks fell in the leadup to the decision, with the Dow Jones down around 1.5 per cent, the S&P 500 down around 0.7 per cent and the Nasdaq Composite down 0.8 per cent on the day. Two-year treasury bond yields were slightly higher ahead of the decision, but reversed to trade 0.02 per cent lower immediately following the decision.
