The U.S. Federal Reserve (Fed) has announced that it will maintain its benchmark interest rates in the range of 3.5% to 3.75%, marking the fifth consecutive meeting without any changes to monetary policy. This decision comes after three rate cuts earlier in 2025 and is the second policy meeting under Chairman Kevin Warsh's leadership.

The Fed's announcement was notably concise, focusing solely on the decision to keep interest rates steady and reaffirming its goal of maintaining 'ample reserves in the banking system.' Importantly, the Fed did not provide any signals regarding the future trajectory of interest rates.

Financial markets reacted swiftly to the announcement. U.S. stocks narrowed their losses, and the U.S. dollar saw a slight increase. Meanwhile, global gold prices experienced significant volatility, soaring by $40 per ounce within minutes of the Fed's announcement, reaching over $4,080 per ounce. This reaction reflects investor caution amid the outlook for monetary policy.

In its economic assessment, the Fed stated that the U.S. economy continues to grow at a 'solid pace,' despite high levels of uncertainty, partly due to geopolitical tensions in the Middle East. However, the Fed emphasized that inflation remains significantly above its 2% target, driven by supply shocks, particularly rising energy prices, which are exerting pressure on overall price levels.

The Fed has committed to prioritizing the goal of bringing inflation back to its target. Prior to the Fed's decision, the CME Group's FedWatch tool indicated that the market assessed a 64% probability of the Fed keeping rates steady in July. Recent data suggested that inflation and the U.S. labor market were showing signs of cooling, leading many investors to believe that the Fed would not need to take immediate action.

Despite these positive signals, Citadel Securities warned that they are not sufficient to eliminate existing risks. They noted that inflationary pressures remain high, while the labor market appears robust enough for the Fed to continue prioritizing price stability.

One of the factors prompting the Fed's cautious approach is the trajectory of energy prices. Although oil prices cooled early in the week after the U.S. paused daily airstrikes on Iran, energy costs are still approximately 20% higher than at the beginning of the month. The cost of living remains a significant concern for millions of Americans, placing pressure on the Fed to bring inflation down to its 2% target.

However, the biggest challenge for Chairman Kevin Warsh is that the causes of current price increases lie beyond the effective reach of monetary policy. U.S. inflation is hovering around 3.5%, still significantly above the Fed's 2% target but much lower than the peak of 9.1% seen in mid-2022. Meanwhile, the labor market has cooled, with wage growth slowing and consumer demand no longer surging as it did in the post-pandemic period.

Experts suggest that much of the current inflationary pressure stems from supply-side issues. The conflict with Iran has disrupted energy supply from the Middle East, driving up prices for diesel, gasoline, and jet fuel. Additionally, tariffs have increased the prices of certain imported goods, although the impact has not been as severe as previously predicted.

Mark Zandi, Chief Economist at Moody's Analytics, argues that in the case of supply shock-induced inflation, raising interest rates is not the optimal choice. He stated, 'The fundamentals of monetary policy indicate that when faced with a supply shock, central banks should avoid overreacting. I believe the Fed should not increase interest rates.' Zandi cautioned that continuing to tighten monetary policy could lead to more consequences than benefits, as high rates could weaken demand and put pressure on both the stock market and the labor market, which remain fragile following the downturn in 2025. 'It's a very dangerous gamble. The labor market is weak, and even a small shock could push the economy into recession,' he added.