Fed keeps rates unchanged but toughens stance on inflation

The US Federal Reserve kept its benchmark interest rates unchanged on Wednesday within a range of 3.50% to 3.75%, as widely expected. However, the accompanying statement proved less comforting for investors who had hoped the central bank would pave the way for a swift rate cut. The most significant shift concerns price pressures: inflation is no longer described as merely "somewhat elevated" but is now characterized as "elevated," partly driven by the recent surge in global energy prices.

For several months, the Fed has been attempting to balance two opposing risks: a labor market that is losing momentum without showing signs of a sharp break, and inflation that remains too far from the 2% target. The statement continues to note that job gains remain weak on average and that the unemployment rate has changed little recently. However, the focus is clearly shifting towards the energy shock and uncertainty in the Middle East, both of which complicate the outlook for imminent monetary easing.

The vote also highlighted internal tensions within the committee. Stephen Miran, a former economic advisor to Donald Trump, once again advocated for a 25bp rate cut. Conversely, Beth Hammack, Neel Kashkari, and Lorie Logan supported maintaining rates but opposed including an easing bias in the statement. This signal suggests that a portion of the committee is now more comfortable with restrictive rhetoric.

Markets have also adjusted their expectations. According to CME FedWatch probabilities, the current range is widely expected to remain in place through until the end of 2026, with an 88.4% probability for December. The first significant move is now being delayed towards September 2027.

Jerome Powell's press conference, at 8:30 p.m. (Paris time), needs to clarify whether this caution represents a simple tactical pause or the start of a more lasting hardening of the monetary message.