(Investing) – The Federal Reserve opted to leave interest rates unchanged at a range of 3.5% to 3.75% at the conclusion of its latest two-day gathering on Wednesday, although three members voted to hike borrowing costs.
Perhaps the biggest issue confronting policymakers was inflation, which has been floating well above the Fed’s 2% target level due largely to the energy shock caused by the Iran war. While consumer price data for June came in softer than anticipated, oil prices have gyrated over much of this month, reflecting the on-again off-again nature of the Middle East conflict.
In theory, the Fed could help to put a lid on price pressure by raising interest rates. However, such a move could imperil a labor market stuck in an environment of low hiring and muted dismissals.
Fed Chair Kevin Warsh, who was overseeing his second rate decision since taking over at the helm of the central bank, stressed that while officials chose to stand pat in July, it doesn’t mean they are not ready to act. “There was nothing inertial about our discussions,” Warsh said.
Long-dated U.S. Treasury yields rose as investors parsed through Warsh’s commentary for any clues about the Fed’s upcoming policy moves. Yields tend to move inversely to prices.
Here’s a look at how Wall Street is gauging the Fed’s latest policy announcement:
“We maintain our view that the Fed will remain on hold this year. Chairman Warsh’s comments imply the bar to hike may be higher than some expected. We forecast disinflation ahead, but stickier inflation is a risk to our call.” – Morgan Stanley
“New Fed chairs are often tested by markets, and today was no exception. Warsh said relatively little, but the price action said plenty. Unlike the June [Federal Open Market Committee meeting], which markets applauded, today’s yield curve steepening signals a credibility problem: the market doesn’t believe Warsh will hike even as the inflation fight remains unfinished.” – Wolfe Research
“The statement seemingly delivered a hawkish hold, with three FOMC voters dissenting in favor of a 25 [basis point] rate hike. But this was unwound by a dovish presser in which Warsh emphasized tightening in financial conditions that now seems inconsistent with his reluctance to react to data.” – Barclays
“[T]he vague and arguably counterproductive communications from […] Warsh during the press conference make forecasting the Fed’s next move even trickier than it already was.” – Capital Economics
“[T]here were a few hints that rate hikes were still on the horizon, with Warsh noting that despite the 9-3 vote, there was ’a lot of agreement on the hard questions’ and mentioning ’all of the action we’re going to have between September and December.’” – Deutsche Bank
“Bottom Line: inflation needs a hike and the market anticipates one, so the central bank should have simply moved today and given a touch more forward guidance (the hawkish hold only creates more uncertainty and will bias long-end yields higher).” – Vital Knowledge
“The [Fed’s policy] statement did not change from June as the Federal Reserve noted that inflation continues to be elevated, driven recently by energy prices.” – Northwestern Mutual Wealth Management
“Specific changes are still to be seen, and we continue to recommend that investors maintain sufficient allocations to quality fixed income in their portfolios. We think that current yields offer an opportunity to lock in attractive income, particularly in short- and medium-maturity quality bonds.” – UBS
