The Federal Open Market Committee kept the benchmark U.S. interest rate at 3.75% on Wednesday evening, in line with market expectations. The decision came about a month after Kevin Warsh took over as Federal Reserve chair, and investors viewed it as an early test of whether he could resist political pressure from President Donald Trump and maintain the central bank’s independence.
Markets have been shifting toward a more hawkish view as inflation has accelerated. After the temporary ceasefire agreement signed on Sunday helped ease oil prices and Treasury yields, Warsh still faces an economy shaped by the Iran war, which pushed energy costs higher and fed broader price increases. Businesses have been passing those costs on to consumers, while inflation has remained above the Fed’s 2% target for five straight years.
U.S. consumer prices rose 4.2% in May from a year earlier, the fastest pace since April 2023. Traders have abandoned bets on renewed rate cuts and instead moved toward the possibility of rate increases. The two-year Treasury yield climbed above 4%, above the Fed’s policy rate, and futures markets are still pricing roughly a 70% chance of a rate hike by the end of the year. April meeting minutes also showed many policymakers thought further hikes might be needed if inflation stayed high, and three members objected to the official statement.
The real focus now is Warsh’s first post-decision press conference and the Fed’s new economic projections, which will be scrutinized for clues about his next move. A forceful anti-inflation message would reassure Wall Street that he is defending Fed independence. A weaker signal could unsettle markets, which fear he may bend to Trump’s demands. Warsh, who served on the Fed’s Board of Governors from 2006 to 2011 and later criticized the central bank, has said artificial intelligence could have a “significant disinflationary force” by boosting productivity. His silence since being sworn in last month has only added to the uncertainty, but his first decision suggests continuity and caution for now.
