San Francisco Frontiers - US Federal Reserve holds rates steady, raises inflation expectations

The Fed decided to hold rates steady at 3.50 to 3.75 percent for the fourth consecutive meeting, with the vote being unanimous for the first time in a year.

Policymakers said economic activity was "expanding at a solid pace despite elevated uncertainty that owes, in part, to the conflict in the Middle East."

"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 decision came at the first meeting of the Federal Open Market Committee (FOMC) since Warsh took charge at the central bank.

Republican President Donald Trump has pushed an unprecedented campaign of intimidation to pressure the Fed to lower interest rates.

However, US inflation came in at a three-year high in April, fueled by Trump's war on Iran, which saw energy prices skyrocket, with knock-on effects on a range of sectors in the world's largest economy.

On Wednesday, Fed leaders also released their Summary of Economic Projections, raising year-end PCE inflation expectations to 3.6 percent from 2.7 percent in March.

American households have been battered by years of rising prices, with inflation climbing above the Fed's long-term two-percent target.

Warsh has backed interest rate cuts in the recent past, despite inflation remaining well above the target -- it was 3.8 percent in April, according to the central bank's preferred gauge.

As expected by analysts, Warsh appeared to join other policymakers in allowing the energy price shock before making a move.

"I think he's going to be in the wait-and-see camp," said Dan North of Allianz Trade. "It's pretty hard to justify a cut when you've got inflation in the pipeline already."

- Hike expected by year end -

Before the war, markets had priced in at least one interest rate cut by the end of the year, but that has changed to the expectation of a hike at the Fed's December meeting.

On Wednesday, Fed policymakers raised their projected year-end interest rate, signalling that they expected one interest rate hike by the end of 2026.

The Summary of Economic Projections was based on input from 18 of 19 policymakers, with one withholding their projection, the Fed said.

Fed Chair Warsh has said he wants to reduce the amount the central bank communicates about its decisions and was widely expected to withhold his projections.

That is part of Warsh's "reform-oriented" agenda. He has called for the Fed to scrap its "dot-plot," a group-tracking of Fed leaders' expectations on rates, while keeping private each board member's individual opinion.

Wednesday's statement was shorter than normal, and removed the forward guidance on the direction of the interest rate, which has been a constant in recent years.

US inflation came in at 3.8 percent in April, according to the Fed's preferred inflation gauge, the Personal Consumption Expenditures (PCE) prices index.

- 'Not helping his case' -

Pao-Lin Tien, an economics professor at George Washington University, told AFP that moving towards more opaque monetary policymaking could mean inflation expectations are less anchored.

"I think our fear would be that without the forward guidance, inflation expectations might become a little bit more volatile," she said.

Trump is likely to be angered by anything short of a rate cut. The 80-year-old Republican wants to see the Fed lower borrowing costs to increase economic activity -- despite the already high inflation.

"President Trump is not helping his own case by making these demands so openly, it makes it harder for anyone he appoints to actually do that," said Tien.

"He does the opposite of what he needs to do in order to make sure the rates go lower," she added, referring to the war on Iran.

G.Collins--SFF