‘The Fed’s on the case,’ Chair Warsh says as rate pause holds 

The Federal Reserve decided against adjusting short-term interest rates at its July 28-29 meeting, with current levels set to hold at least until the central bank meets next in mid-September.

No 'explicit change,' but that's just 'the beginning of the story'

The Federal Open Market Committee (FOMC) voted 9-3 to keep rates at the 3.5% to 3.75% level. The Fed hasn't adjusted short-term rates since late last year, when officials indicated that they were anticipating a pause following three consecutive rate cuts.

But at a July 29 press conference, Fed Chair Kevin Warsh objected to characterizing the Fed's latest rate decision as "a pause." Instead, Warsh said he would describe the July meeting as "a rigorous review of the economic situation," "a review of the big, hard questions" and "a view of what our own homework is."

Under Warsh's leadership, the Fed has begun "a new chapter," he explained, "and we understand that the five-plus years of inflation above target cannot be cured in nine weeks" or by one month of softening inflation.

"Did the Fed take an explicit change in its policy rate today? No," Warsh said, "but I think that's the beginning of the story, not the end of the story."

Economic expansion amid uncertainty

In its July 29 statement, the FOMC noted that economic activity in the U.S. "is expanding at a solid pace despite elevated uncertainty," which it credited in part to the ongoing war in Iran.

"Productivity growth and capital investment are strong. Job gains have kept pace with the workforce, and the unemployment rate has changed little," the statement said, adding that inflation, which hit a three-year high in May before easing slightly in June, is still above the Fed's 2% target rate.

Neither a rate cut nor a rate hike was anticipated, according to Eric Orenstein, senior director at Fitch Ratings. "Mortgage rates are at their highest level in a year," Orenstein said, "and as expected the Fed didn't offer any relief today."

NAR Chief Economist Lawrence Yun echoed that the central bank's latest move was "no surprise" given that inflation is "not fully under control."

Fed divided on whether to hold, hike: 'A family fight'

The FOMC's discussions this week, which Warsh referred to as "collegial and constructive," focused on inflation, price increases, the past few years of economic shocks and the strategies that could be implemented to stabilize prices.

"Most of our discussions were on the big questions that matter to the conduct of monetary policy," Warsh said.

The three FOMC members who voted against holding rates steady at the July meeting — Fed Bank of Cleveland President and CEO Beth Hammack, Fed Bank of Minneapolis President Neel Kashkari and Fed Bank of Dallas President and CEO Lorie Logan — had wanted to raise rates.

Despite the split vote, Warsh voiced optimism that while the FOMC members bring "different perspectives, different views, different judgments," they are also "eager to roll up their sleeves and have a family fight."

"What I can offer as assurance is that the Fed's on the case," he told reporters. "This Fed chairman feels better about this board and this committee's ability to deliver than I did when I showed up here on the first day."

Future rate hike still possible

As the three dissenting FOMC members indicated with their votes, a rate hike later this year isn't out of the question.

"With oil prices see-sawing, inflation data more subdued and employment hanging tough, doing nothing was the best course of action," William Raveis Mortgage Regional VP Melissa Cohn said of the July vote. Whether the Fed moves to raise rates at its next meeting will depend on "the data over the next two months," Cohn added.

Yun, meanwhile, predicted that the central bank "will not cut interest rates until oil prices and overall inflation fall to more favorable levels."