U.S. Interest Rate Outlook Clouded as Internal Split Looms Ahead of the 'Warsh Era'

The Federal Reserve System (the U.S. central bank) kept its benchmark rate unchanged at 3.50% to 3.75% on the 29th local time. It was the third straight decision to hold rates, following January and March. The Fed made the decision on the second day of its regular FOMC meeting.
As a result, the interest rate gap between South Korea's 2.50% rate and the U.S. rate remained at 1.25 percentage points at the upper end.
Explaining the rate hold, the Fed said, "Inflation remains elevated, partly reflecting higher global energy prices," and added that "developments in the Middle East are creating a high degree of uncertainty."
The Fed said, "The committee seeks to achieve maximum employment and a 2% inflation target over the longer run," and added that it would closely review economic data, changes in the outlook and risk factors when deciding future benchmark rates.
It also said, "If risks emerge that could hinder the achievement of our goals, we are prepared to adjust the stance of monetary policy as appropriate." The remark was interpreted as signaling the possibility of future rate cuts.
In the policy statement released that day, eight members supported the decision, while four voiced dissents. It was the first time in 34 years, since Oct. 6, 1992, that four formal dissents were recorded in a policy decision, underscoring uncertainty over the Fed's future rate path.
Stephen Miran, a Fed governor and a close economic adviser to Donald Trump, was the only one to oppose the rate hold, calling for a 0.25 percentage point cut. Three other members objected to including a "dovish stance" in the statement, which would have signaled that future cuts were more likely than hikes. Those three wanted the Fed to make it clearer that its next move would not necessarily be a rate cut.
Inflation remains high, and the risk of further increases is limiting room for rate cuts. At the same time, concerns about a cooling labor market are making rate hikes harder to justify, suggesting that the Fed's dilemma over future policy decisions will deepen. In particular, uncertainty is expected to grow further when Powell steps down next month and a new Federal Reserve leadership takes over.
When Powell's term ends on the 15th of next month and he steps down, nominee Kevin Warsh is expected to preside over the meeting.
jjyoon@fnnews.com Yoon Jae-jun Reporter