Fed Holds Rates Steady for Third Time... Hawkish Stance Strengthens Amid Chair Transition and Iran War

Three Members Advocate 'Hawkish' Hold
Call for Removal of Language Signaling Rate Cuts
Brent Crude Hits Highest Level in Four Years

The U.S. Federal Reserve (Fed) has kept its benchmark interest rate unchanged for the third consecutive time amid surging energy prices and inflation uncertainty triggered by the war with Iran. This meeting saw an unusually high number of dissenting views, with four members expressing differing opinions, highlighting widening divisions over the direction of future monetary policy. The emergence of “hawkish hold” voices during this period of leadership transition, with Fed Chair Jerome Powell set to step down, also drew attention.

AP Yonhap News

The Federal Open Market Committee (FOMC) announced on the 29th (local time) at its regular meeting that it would keep the benchmark interest rate steady at 3.50–3.75%. After cutting rates three times last September, October, and December, the Fed has now paused for three consecutive meetings—January, March, and this latest session. As a result, the interest rate gap with South Korea (2.50%) remains at a maximum of 1.25 percentage points.

The Fed cited high energy prices and inflation as reasons for holding rates steady. In its statement, the Fed explained, “Inflation remains elevated, partly reflecting the recent increase in global energy prices,” and added, “Changing dynamics in the Middle East are causing a significant degree of uncertainty for the economic outlook.”

When asked at a press conference how the inflation outlook had changed, Chair Jerome Powell responded, “It is very difficult to predict when it comes to energy. Oil price shocks are often temporary and tend to reverse, and monetary policy operates with a lag, so it is generally not appropriate to react immediately.”

However, he added, “Whether to ignore the energy shock is not the question at hand. We have not yet reached the peak, and until we see the shock pass and make progress on tariff issues, we will not consider rate cuts.”

The yield on the two-year U.S. Treasury note, which is sensitive to interest rate expectations, climbed to 3.93%, its highest point in a month. The ten-year Treasury yield also rose to 4.42%.

Three Members Call for Dropping ‘Easing Bias’ Language... Hawkish Voices Emerge

The key takeaway from this meeting was the internal division. Previously, dissenting opinions typically numbered only one or two, but this time there were four—something not seen since October 1992, 34 years ago.

Fed Governor Stephen Miran was the only one to advocate a 0.25 percentage point rate cut. In contrast, Beth Hammack, President of the Federal Reserve Bank of Cleveland, Neel Kashkari, President of the Federal Reserve Bank of Minneapolis, and Lorie Logan, President of the Federal Reserve Bank of Dallas, supported holding rates steady but opposed the inclusion of language in the statement suggesting an “easing bias.”

The controversial phrase appears in the third paragraph of the statement: “In considering the extent and timing of any additional adjustments to the target range for the federal funds rate, the Committee will carefully assess incoming data, the evolving outlook, and the balance of risks.”

Typically, following each FOMC meeting, the Fed includes language in the statement hinting at the direction of future rate moves. The statement for April, like March, retained the phrase “extent and timing of any additional adjustments.” Maintaining this language, which first appeared when the Fed was considering rate cuts, is interpreted as a signal toward easing.

Bloomberg noted that since January, more committee members have called for a shift in language to allow for possible rate hikes; however, the statement was not amended this time.

Asked why the phrase was retained, Chair Powell explained, “The number of members supporting a more neutral stance is increasing, but the majority still do not want that change, and I also felt it was not necessary at this meeting.”

However, he hinted that the language could be changed in the future, saying, “What happens over the next 30 days or 60 days, or even before the next (June) meeting, could significantly change the background for that phrase.”

When asked whether some members' calls for a rate hike—regardless of the war—meant there was a real possibility of an increase, Powell replied, “There is no opinion right now that we should raise rates immediately. But there is debate about whether we should move to a neutral stance, and that is a valid discussion.”

Subadra Rajappa, Head of U.S. Research at Societe Generale, commented, “The number of dissenting voices this time clearly surprised us and the market, and it could lead to a shift away from an accommodative monetary policy stance at future FOMC meetings.”

Prolonged Closure of the Strait of Hormuz... Powell: “Inflation Instability”

The growing hawkishness within the Fed is due to concerns that rising energy prices may persist longer than expected. According to the Financial Times (FT), Fed officials are grappling with the impact of surging energy costs on the broader economy.

On the same day, U.S. President Donald Trump told Axios in a telephone interview that the U.S. would maintain its maritime blockade on Iran until Tehran agrees to a deal that addresses U.S. concerns over its nuclear program.

As a result, Brent crude oil futures, the international benchmark, soared 6.1% from the previous session to close at USD 118.03 per barrel. During intraday trading, Brent futures peaked at USD 119.76 per barrel, reaching the highest level in nearly four years since June 2022.

In February, U.S. personal consumption expenditures (PCE) rose by 2.8% year-on-year and 0.4% month-on-month. Excluding energy and food, core PCE increased by 3.0% from a year earlier and 0.4% from the previous month.

The core PCE growth rate had dropped to 2.6% in April last year but has since rebounded and remains in the 3% range, failing to slow further. The Fed uses the PCE growth rate as its benchmark for inflation.

Asked whether rising oil prices could spill over into core inflation, Powell said, “That possibility does exist, but it is still uncertain,” and added, “Current policy is at a good level for waiting and watching (at the upper bound of the neutral rate).”

He added, “The labor market is stable, but inflation remains somewhat unstable. We do not know how long the oil shock will last, nor how long the Strait of Hormuz will remain blocked.” He concluded, “For now, it is appropriate to wait and see how the situation develops.”

This content was produced with the assistance of AI translation services.