Three dissenters favor rate hike as inflation pressure could push September increase [U.S. rate freeze for fifth straight meeting]

NEW YORK, Financial News = Lee Byung-chul, correspondent] The Federal Reserve kept its benchmark rate unchanged at 3.50% to 3.75% on the 29th local time, but the decision was widely seen as a hawkish hold. Three officials dissented, arguing that the benchmark rate should be raised by 0.25 percentage point. It was the largest number of dissents in a monetary policy decision since 1979.
Mark Giannoni of Barclays PLC told the Financial Times (FT) that the Federal Open Market Committee (FOMC) maintained a hawkish hold. As a result, markets priced in the possibility of further tightening, sold off long-term U.S. Treasurys, and pushed Treasury yields sharply higher.
In its statement, the Fed cited solid U.S. economic growth and a stable labor market as reasons for holding rates steady. Wall Street said the 0.4% month-on-month decline in the June Consumer Price Index (CPI), helped by a sharp drop in oil prices, gave the Fed more room to wait and watch how conditions develop.
The Fed said, "Despite high uncertainty stemming from the conflict in the Middle East, economic activity continues to expand at a solid pace." It also said employment gains are keeping up even as the labor force shrinks, while the unemployment rate remains stable with little change. Still, mindful that inflation remains above target, it kept its existing line that "the Committee will achieve price stability" without adding new language on the inflation outlook.
■ Warsh: "Both nominal and real rates have risen"
Those who called for a rate hike at this FOMC meeting were Beth Hammack, president of the Federal Reserve Bank of Cleveland, Neel Kashkari, president of the Minneapolis Fed, and Lorie K. Logan, president of the Dallas Fed. In the statement released after the meeting, it was noted that they favored raising the benchmark rate by 0.25 percentage point at this meeting. They have consistently argued that additional tightening is needed given inflation that has remained above the Fed's 2% target for more than five years.
The fact that three members dissented on the rate hold shows that hawkish sentiment within the Fed is strengthening. Renewed armed clashes in the Middle East have also reinforced that mood.
At the press conference, Warsh reaffirmed that the Fed's top priority is to achieve its 2% inflation target. He said, "There is no loose inflation target. The only target is annual inflation of 2%." He added, "High inflation that has persisted for more than five years is not something that can be fixed quickly, but we will not waver." He also stressed, "The Fed's credibility depends on achieving price stability."
He pointed to the rise in market rates, both nominal and real, since the previous meeting and argued, "Even though the Fed kept the benchmark rate unchanged, financial conditions are already moving in a tighter direction." He added, "That shift is giving the Fed some relief."
■ Markets turn to the September FOMC
Asked about the internal disagreement, Warsh described it as "a good family discussion." He emphasized that although there were differences over the rate decision, there was broad agreement among members on the goal of price stability and the policy tools needed to achieve it. He added, "I am even more confident that we are a team that can win the fight against inflation."
The rate-hike camp inside the Fed remained firm. Logan said, "A modest additional rate increase is needed," while Hammack has also stressed the need for tighter policy, saying persistent price increases are weighing on households.
Market attention is now shifting to the FOMC meeting on Sept. 15-16. Two upcoming CPI releases before then are seen as key factors that will determine the direction of rates. Kurt Lewis, a former senior adviser at the Fed and now with Piper Sandler, told the WSJ that "the bar for the Fed to take further action this year is not very high" and predicted that "if inflation pressures come in stronger than expected over the next two months, the Fed will raise rates."
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