The Fed Doesn’t Cut Interest Rates – What This Means for Americans

The Federal Reserve held its June policy meeting on June 16 and 17. This was a widely watched gathering because it was the first one led by new Chairman Kevin Warsh. But why does everyone pay close attention to the US central bank’s meetings? From interest rates to balance sheet considerations, the Fed influences many aspects of daily life.

Fed Stays Put

The 12-member Federal Open Market Committee, which is in charge of monetary policy decision-making, voted unanimously to keep the benchmark federal funds rate in the current target range of 3.5% to 3.75%. It marked the fourth straight meeting in which the Fed did not take action on interest rates.

Also known as the FFR, it is the rate banks pay to borrow money from each other overnight. The policy tool influences borrowing costs for businesses and consumers, whether for credit cards or personal loans. It can also impact how much the federal government pays to borrow from lenders.

By leaving interest rates unchanged at their current level – experts call it “higher for longer” – the Fed will keep borrowing costs elevated.

But investors also focused on what the central bank might do at the next meeting and in the coming months, and these expectations could also affect the broader economy.

Chairman Kevin Warsh, who was nominated earlier this year by President Donald Trump to replace Jerome Powell, suggested that his primary focus is on fighting inflation. He correctly noted that the Fed has missed its 2% inflation target – the goal of major central banks worldwide – for more than five years.

“We recognize that inflation has been running well ahead of the Fed’s long-stated inflation goal of two per cent that’s been going on for more than five years,” Warsh told reporters at the post-meeting news conference. “Persistently high prices are a burden for the American people, but the recent past need not be prolonged.”

As a result, financial markets began pricing in at least one rate hike this year. Yields on US government bonds also climbed. The two-year yield, which reflects expectations for Federal Reserve policy, shot up to nearly 4.2% after the Fed’s June decision.

Bond yields are some of the key drivers of business and consumer borrowing costs.

Mortgage rates, for example, are driven in part by the benchmark ten-year yield. So, when the ten-year rises, the 30-year mortgage rate will also climb. This was on display last week: The 30-year rate stood at 6.54% before the Fed meeting and then jumped to 6.62% by the end of June 17, according to data from Mortgage News Daily.

At the same time, the Fed might have little impact on medium- and long-term yields if investors are worried about the economy or Washington’s ballooning deficits and debt.

Harder to Decipher

Under Warsh, the Fed could return to the 1990s when the institution communicated very little to the general public. Starting in the early 2000s, the central bank started issuing forward guidance – signaling what it could do in the future – to enable the financial markets to do some of the work for monetary policymakers. Warsh believes this should stop.

The idea is that the Fed will determine what to do based on how financial markets respond to economic data and world events, not the other way around. This could make it harder for investors to chart the path for monetary policy, including interest rates.

Even the post-meeting statement was briefer, coming in at 130 words compared to the usual 300 to 400 words.

Will the Fed cut, hike, or pause this year? That is the question investors are pondering.

1. The June 16-17 Federal Reserve policy meeting was the first under the leadership of Kevin Warsh.
2. The Fed had hoped to drop inflation to 2% but failed.
3. Under Warsh’s leadership, the Fed might return to the old ways of not sharing much with the public.