The U.S. Federal Reserve held its benchmark interest rate steady, but reaffirmed its commitment to price stability, prompting markets to increasingly reflect the possibility of a rate increase in September. Fed Chair Kevin Warsh emphasized in his first monetary policy meeting since taking office that he would not "waver until achieving the 2% inflation target," and an unusually high number of dissenting votes from policy committee members indicated that hawkish sentiment is strengthening within the Fed.

▲ Benchmark Rate Held Steady…In Line with Market Expectations

According to Reuters on the 29th (local time), the Fed decided to maintain its benchmark interest rate at 3.50-3.75% annually at its Federal Open Market Committee (FOMC) meeting. While this decision aligned with market expectations, it confirmed that the Fed's tensions surrounding inflation remain at elevated levels.

At this meeting, three of the 12 policy committee members—presidents of the Federal Reserve Banks of Cleveland, Dallas, and Minneapolis—dissented, preferring a 0.25 percentage point rate increase.

These three individuals were the same ones who expressed opposition at the April meeting, the last under former Chair Jerome Powell, by arguing that language suggesting the possibility of future rate cuts should be removed from the policy statement.

▲ Warsh: "Will Not Tolerate Inflation"

Warsh, who took office as Fed chair in May, has repeatedly stated his position that inflation exceeding the central bank's target of 2% persisting for more than five years is "unacceptable."

He assessed that energy and food prices have risen due to Middle Eastern conflicts, and demand has increased due to expanded investment in artificial intelligence (AI) data centers, resulting in sustained upward pressure on prices.

▲ Statement: "Inflation Still Above Target"

The Fed stated in its policy statement that "inflation continues to exceed the Committee's 2% objective."

Its assessment of the economic situation remained the same as the June statement. Economic activity continued to show solid growth, employment increases were broadly consistent with labor force growth, and the unemployment rate remained stable without significant changes.

▲ "Will Not Waver Until Achieving 2%"

Chair Warsh emphasized at a press conference that "high inflation persisting for more than five years cannot be solved by merely a few weeks or a month of price moderation," and that "this Federal Reserve will not waver in the process of bringing inflation back to the 2% target."

Regarding the future policy direction, he avoided specific comments but stated that "we will not hesitate to act when necessary and appropriate."

Fed Chair Kevin Warsh (Photo : [EPA/Yonhapnews])

▲ Market's Rate Increase Expectations Positively Assessed

Chair Warsh evaluated the rise in Treasury yields since the last meeting as a result of markets reflecting future rate increases, while explaining that the Fed does not necessarily have to follow market movements exactly.

He stated that he positively assessed investors' independent judgment in forming markets rather than relying solely on Federal Reserve members' statements and dot plots.

He added that "while the Fed does not support specific market movements, we are watching changes in market prices very closely."

▲ Changes in Short and Long-term Interest Rate Trends

Following the June meeting, the U.S. Treasury market showed a flattening of the yield curve as short-term rates rose more sharply than long-term rates.

However, following this policy announcement, the flow reversed. While the two-year Treasury yield fell, the ten-year and thirty-year yields rose, steepening the yield curve again.

In particular, the thirty-year Treasury yield surpassed 5.20% for the first time since 2007.

▲ Experts: "Likelihood of September Rate Increase Heightened"

The market began assessing the possibility of Fed rate increases more highly.

Omaur Sharif, CEO of Inflation Insights, forecasts that "unless the job market deteriorates sharply or the core inflation rate slows rapidly to around 2% on an annualized basis, there is a strong possibility of a 0.25 percentage point rate increase at the September FOMC."

▲ Fed's Hawkish Sentiment Strengthened

Experts analyzed that three committee members advocating for rate increases in this meeting itself signals a change in sentiment within the Fed.

Kathy Bozanich, chief economist at Nationwide, assessed that "the high number of dissenting votes means that policy committee members are becoming much more hawkish than before."

However, she analyzed that "because energy supply shocks stemming from the Middle East and price increases due to expanded AI investment are difficult to solve through rate increases alone, it may be appropriate for the Fed to maintain current rates this year."

▲ Maintaining Strategy of Keeping Current Interest Rates

The Fed maintained its assessment that the current benchmark rate it has maintained since December last year is sufficiently constraining demand across the economy and having the effect of gradually lowering inflation excluding temporary factors.

Chair Warsh reiterated expectations that productivity improvements resulting from AI technology advancement could raise economic growth while not increasing inflation pressure, but did not provide specific views on future benchmark rate outlooks.

▲ Market Reflects 57% Possibility of September Rate Increase

Before the meeting, the financial market reflected the possibility of a rate increase at this meeting at about one-third level, and forecasted that if held steady, a rate increase would essentially occur at the September meeting.

Indeed, following the policy announcement, based on the CME FedWatch, the possibility of a September rate increase was reflected at approximately 57%.

The Fed will confirm two additional rounds of consumer price and employment indicators before the September meeting. Accordingly, whether the recently observed moderating trend in inflation continues is expected to serve as a key variable determining the future direction of monetary policy.