Fed holds rates at 3.5-3.75% in 9-3 vote, three dissenters signal hawkish pivot

The Federal Reserve held its benchmark interest rate steady at 3.5% to 3.75% on Wednesday, but the decision was far from unanimous. Three members of the Federal Open Market Committee voted to raise rates by a quarter point, marking the first time in nearly a decade that three FOMC participants have dissented in the same direction.

The dissenters were Cleveland Fed President Beth Hammack, Minneapolis Fed President Neel Kashkari, and Dallas Fed President Lorie Logan. All three favored a 25-basis-point increase. The 9-3 vote was the largest split on the FOMC since 2016, when Janet Yellen chaired the committee, according to Macquarie analysts Thierry Wizman and Gareth Berry, as reported by Fortune.

The Federal Reserve’s post-meeting statement, kept brief under Chair Kevin Warsh, said: “Economic activity is expanding at a solid pace despite elevated uncertainty that owes, in part, to the conflict in the Middle East. Productivity growth and capital investment are strong. Job gains have kept pace with the workforce, and the unemployment rate has changed little.”

Inflation remains the central bank's primary concern. The statement added: “Inflation remains elevated relative to the Committee's 2% goal, in part reflecting supply shocks that have driven price increases in certain sectors, including energy. The Committee will deliver price stability.”

The U.S. consumer price index rose 3.5% in June from a year earlier, down from 4.2% in May, according to multiple sources. Core CPI, excluding food and energy, stood at 2.6%. While the headline figure eased, it remains above the Fed’s 2% target, and the recent flare-up in hostilities between the U.S. and Iran has pushed oil prices back to around $90 a barrel, threatening to reignite inflation.

The decision puts Warsh in a politically sensitive position. Appointed by President Donald Trump in May to replace Jerome Powell, Warsh has now presided over two rate meetings, both of which left rates unchanged. Trump has publicly called for lower rates. After Wednesday’s decision, Trump did not criticize Warsh, calling him “fantastic” but constrained by the board. “He’s got a board, and it’s a political board, and they want to keep rates up,” Trump said, according to the Washington Times. “But we fight through rates.”

House Ways and Means Committee Chairman Jason Smith, a Missouri Republican, urged the Fed to cut rates, saying “one factor holding back further growth is persistently high interest rates,” as reported by the Washington Times.

Warsh, in his press conference, described the committee’s discussions as “collegial and constructive.” He said he “asked for a good family fight, and I got one.” He also characterized the Fed’s current posture as “watchful thinking” rather than “watchful waiting,” according to US News. He reiterated the Fed’s commitment to the 2% inflation target.

The dissent has led analysts to expect a more hawkish tone in the weeks ahead. Macquarie’s Wizman and Berry told clients the FOMC was “wracked by something more serious than a ‘family fight,’” and predicted the regional presidents would increasingly voice their readiness to tighten policy. “Warsh can suppress dissent only so much,” they said, as reported by Fortune. The analysts expect the dissenters to “mutiny, if need be” before the next meeting in September.

Market pricing reflects a growing expectation of a rate increase. According to CME Group’s FedWatch tool, as reported by Nasdaq, there is more than an 80% probability of a rate hike as early as September, and an over 92% chance of higher rates by the end of 2026. However, a Reuters poll of 104 economists conducted July 17-21 found that three-quarters of respondents expect the Fed to hold rates steady for the rest of 2026, citing softening labor data and a cooler CPI.

The U.S. labor market remains a mixed picture. The unemployment rate held at 4.2% in June, but the Bureau of Labor Statistics data showed hiring stalled and 720,000 workers left the labor force entirely, according to Nasdaq. Real wage growth was 3.5% year-on-year, signaling that inflation continues to eat up most nominal wage gains.

Financial markets reacted negatively to the decision and the hawkish undertone. The Dow Jones Industrial Average dropped 700 points ahead of the announcement and lost another 100 points after the Fed released its statement, according to US News. The U.S. dollar fell 1.41% on the day, an unusually sharp move for the world’s reserve currency, as reported by Fortune. Bond yields rose, with the 2-year Treasury yield at 4.287% and the 10-year at 4.647%, according to US News.

“The Fed appears to be running out of patience with above-target inflation,” said Kay Haigh, global head and chief investment officer of fixed income and liquidity solutions at Goldman Sachs Asset Management, as quoted by US News. “The committee’s growing hawkish sentiment, shown by the three dissents against today’s hold, has also likely been exacerbated by the recent flare up in hostilities in the Middle East. A hike in September is finely balanced.”

The next FOMC meeting is scheduled for September 15-16.