Fed Holds Rates at 3.5%-3.75% as Warsh Takes Chair, Inflation at 4.2%

The Federal Reserve kept interest rates unchanged at 3.5% to 3.75% on June 17 as Kevin Warsh held his first meeting as chair. Inflation jumped to 4.2% in May, the highest in three years, mostly from energy prices tied to the U.S. war with Iran. Warsh faces pressure from President Trump to cut rates, but rising inflation and a strong labor market make cuts unlikely soon.

Why Inflation Is Stuck in the Wrong Direction

The Consumer Price Index hit 4.2% year over year in May, up from 3.8% in April. Energy prices drove most of the increase, jumping 23.5% over the past year as the Iran conflict disrupted tanker traffic in the Strait of Hormuz. Even after oil prices fell following a ceasefire agreement, gasoline remains more than a dollar a gallon higher than before the war began.

The Fed’s main tool to fight inflation—raising interest rates—does little to solve supply shocks like this. Higher rates cannot produce more oil or gasoline. Some Fed members have signaled their next move could be a rate increase, not a cut, if inflation stays elevated.

Warsh’s First Test: Managing a Divided Committee

Warsh inherited a Fed committee split on the path forward. April’s rate decision passed 8 to 4, with four members dissenting in opposite directions. One member wanted a 25 basis point cut. Three others wanted to remove the easing bias from the Fed’s statement. The committee will release updated economic projections today, including a revised dot plot showing where members expect rates to go.

Analysts expect Warsh to take a neutral stance. Warsh has been critical of the dot plot, believing it limits the Fed’s flexibility. Markets are betting rates will be higher at year-end than today, suggesting investors expect no cuts soon.

Trump Wants Cuts, But Inflation Blocks the Path

President Trump nominated Warsh hoping he would push for lower rates to boost growth. But inflation at a three-year high makes cuts impossible for now. Trump has backed off his relentless rate-cut demands, and even acknowledged that rate hikes might be needed to control prices.

Meanwhile, analysts expect the Fed to remove its bias toward rate cuts from its statement. The labor market remains strong, with May payrolls at 172,000 against an 80,000 consensus. This removes another reason to cut rates soon.

A Historic Moment: Two Chairs at the Table

For the first time in 75 years, a current and former Fed chair sit on the same committee. Jerome Powell chose to stay on the Board of Governors after his term as chair ended in May. Powell still has nearly two years left on his term. The last time this happened was in 1951 when Mariner Eccles served as governor after leaving the chair.

Former Fed officials expect the two to work together smoothly. Powell is likely to keep a low profile, and Warsh is known for good people skills. The White House continues to criticize Powell, but observers do not expect internal conflict.

Final Thoughts

The Fed held rates steady as Warsh took the helm, with inflation at 4.2% blocking near-term cuts. Investors should expect rates to stay put or rise if inflation does not cool, making any 2026 rate cuts unlikely.

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