The Zhitong Finance App learned that Federal Reserve Chairman Kevin Walsh said on Wednesday that the Fed's decision to keep interest rates unchanged does not mean that the policy has come to a standstill; the central bank will remain firmly committed to achieving the 2% inflation target, and emphasized that the Commission does not have any “soft inflation target.”
After the two-day monetary policy meeting, the Federal Open Market Committee (FOMC) decided with 9 votes in favor and 3 against to keep the federal funds rate target range unchanged at 3.5% to 3.75%, for the fifth time in a row. However, Dallas Federal Reserve Chairman Logan, Cleveland Federal Reserve Chairman Hamak, and Minneapolis Federal Reserve Chairman Kashkari voted to raise interest rates by 25 basis points, indicating that some policymakers increasingly believe that policies need to be further tightened to contain the resurgence of inflationary pressure.
The statement of this meeting is almost exactly the same as the statement made after the June meeting. The Federal Reserve reiterated that it will continue to work to “achieve price stability,” and stated that US economic activity is still expanding at a “steady pace” and that capital investment and productivity growth are still strong. At the same time, it once again emphasized that the current level of inflation is still above the long-term target of 2%.
At a press conference after the meeting, Walsh said that high inflation over the past five years has made some households, businesses, and market participants mistakenly believe that the Federal Reserve's default inflation target is already higher than 2%. “Let me repeat once again that the Federal Reserve does not have a so-called 'soft inflation target',” Walsh said. “The current Federal Open Market Committee will not accept any implied, higher inflation target.”
The fact that three officials supported the interest rate hike this time also reflects the widening differences within the committee over the outlook for inflation. Since Walsh became the chairman of the Federal Reserve in May this year, he has always emphasized the importance of restoring the 2% inflation target, but until now he has not clearly indicated whether he supports further interest rate hikes. In response to questions from reporters on the same day, he gave off a signal that he was more hawkish.
Walsh said that if inflation continues to be high during the forecast period ahead, interest rates “may well be part of the solution,” but monetary policy will not be the only tool.
As to why the current meeting did not choose to raise interest rates, Walsh said that since the last interest rate meeting, market interest rates have clearly risen, which means that the financial market has actually completed some of the austerity work for the Federal Reserve. He believes this is related to the Federal Reserve's recent reduction in forward-looking guidance on future interest rate paths.
“The market has made its own judgments because we have reduced our guidance on market expectations to a certain extent.” Walsh said, “The nominal interest rate expectations corresponding to the entire US Treasury yield curve have risen.”
Before the meeting was held, many Federal Reserve officials said that the current policy position is still quite appropriate, but at the same time hinted that if inflationary pressure persists, they may support further interest rate hikes in the future. The inflation index favored by the Federal Reserve, the personal consumption expenditure (PCE) price index, has risen to 3.4% year-on-year as of May. The latest inflation data will be released on Thursday.
The June inflation data once mitigated market expectations for an interest rate hike at this meeting. In the same month, the US consumer price index fell for the first time in six years, mainly affected by the fall in gasoline prices during the Iran war; the increase in the producer price index (PPI) announced during the same period was also lower than market expectations.
However, as the situation in the Middle East escalated again, the price of Brent crude oil once broke through $100 per barrel. Despite a recent decline, it remained around $90 per barrel on Wednesday. Furthermore, the new round of tariff measures and the increase in demand driven by AI have further heightened market concerns that inflation may remain high for a long time. Meanwhile, the US job market has maintained moderate and steady growth, and the unemployment rate has remained low.
It is worth noting that before this interest rate meeting was held, some economists had anticipated that Walsh might unexpectedly support interest rate hikes, while federal funds rate futures once showed that the probability of interest rate hikes at this meeting was as high as 40%. After the announcement of the resolution, US two-year Treasury yields declined, indicating that the market's expectations for the Federal Reserve's further tightening policy in the short term have cooled down.