Fed holds rates at 3.75% as 3 dissenters push for hike, dollar slides

The Federal Reserve held its benchmark rate at 3.50%-3.75% on Wednesday, the sixth consecutive pause since December, as three of 12 voting members dissented in favor of a quarter-point hike — the most internal opposition since April.

"This discussion was far more robust than the outcome suggests," Chair Kevin Warsh told reporters. "I asked for a good family fight, and I got one."

The dollar weakened broadly after the decision, with the euro climbing 0.6% to $1.1467 and the Norwegian krone gaining 0.9%. The S&P 500 and Nasdaq trimmed earlier losses, while gold rose 1.2%. Bitcoin advanced above $64,400.

The split vote highlights the Fed's dilemma: inflation at 3.5% remains well above the 2% target, driven partly by supply shocks from the Iran conflict, yet raising rates risks slowing an economy where job growth has already missed expectations. The next decision arrives Sept. 16.

Dissenters Break Ranks

Cleveland Fed President Beth Hammack, Minneapolis President Neel Kashkari and Dallas President Lorie Logan each preferred a quarter-point increase, arguing that elevated inflation required tighter policy. Hammack had previously warned that artificial-intelligence investment was stoking price pressures, while Logan said "modestly higher interest rates would better balance the outlook and risks."

The three dissents marked a departure from June, when Warsh's first meeting produced a unanimous hold. "The committee's growing hawkish sentiment has also likely been exacerbated by the recent flare-up in hostilities in the Middle East," said Kay Haigh, global head of fixed income and liquidity solutions at Goldman Sachs Asset Management.

Warsh Rewrites the Playbook

Warsh used his second press conference as chair to reinforce his break from predecessor Jerome Powell's communication style, declining to offer forward guidance on the path of rates. "Market participants are learning to play the ball, not the referee," he said. "This is, in my view, a change for the better."

The Fed's statement cited "supply shocks that have driven price increases in certain sectors, including energy" as a factor keeping inflation elevated. Warsh said the central bank is "laser-focused" on returning inflation to 2% but cautioned that "the suggestion that we're going to be able to do it with our magic wand is one I want to disabuse you of."

The 10-year Treasury yield traded near 4.65%, near its highest since January 2025, as markets priced a 55% probability of a September hike, according to CME FedWatch data. Warsh is scheduled to deliver his first Jackson Hole address in late August, where he is expected to outline his vision for the task forces he created to revamp the Fed's approach to data, communication and inflation.

Cross-Asset Fallout

The dollar's decline was broad-based. The British pound rose 0.51%, the Swiss franc strengthened 0.54% against the greenback, and commodity-linked currencies rallied, with the Australian dollar up 0.32% and the New Zealand dollar gaining 0.32%. The Canadian dollar rose 0.46% as oil prices surged, with Brent crude topping $90 a barrel after fresh fighting between the US and Iran overnight.

The Dow Jones Industrial Average had fallen more than 700 points in morning trading before paring losses after the decision. The Nasdaq Composite rose nearly 1% in afternoon trading as technology shares recovered from earlier declines ahead of earnings from Microsoft Corp. and Meta Platforms Inc.

Vanguard said after the decision that it expects the central bank to hold rates for the remainder of the year. "Our base case remains a prolonged period of policy stability," said Adam Shickling, a senior economist at Vanguard. "While inflation remains elevated, we believe a cooling labor market and the limited effectiveness of monetary policy against supply-driven inflation pressures will make additional rate hikes difficult this year."

This article is for informational purposes only and does not constitute investment advice.