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The Federal Reserve is holding its benchmark interest rates steady, but financial markets are acting as if they expect higher rates in the months to come. NPR's Scott Horsley reports.
SCOTT HORSLEY, BYLINE: The Federal Reserve has not adjusted interest rates since the end of last year, but with inflation still uncomfortably high and average gasoline prices back above $4 a gallon, there's growing pressure for a rate increase. Three of the 12 voting members on the Fed's rate-setting committee said they would have preferred to raise rates by a quarter percentage point yesterday, and investors see a better-than-even chance that the central bank will raise rates at its next policy meeting in September.
Fed Chairman Kevin Warsh has said he welcomes robust debate on the committee - or what he calls a good family fight - but Warsh told reporters any disagreement on the committee is about tactics and timing, not the basic goal of wrestling inflation under control.
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KEVIN WARSH: There was a lot of agreement that I heard that we have the powers, the tools, also the authority to deliver stable prices.
HORSLEY: In the past, the Fed's interest-rate decisions were often telegraphed well in advance to avoid rattling financial markets. Warsh, however, wants to limit such forward guidance so the central bank will have more room to maneuver.
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WARSH: Surprises are not the objective, but at the same time, I would say we didn't come into this meeting feeling constrained by the full range of alternatives we had in front of us.
HORSLEY: At first, markets seemed to take the Fed's decision to stand pat with rates in stride, but late in the day, stocks tumbled. Bond yields rose, suggesting investors think interest rates will have to go higher in the future.
Inflation has already been higher than the Fed would like for more than five years now. Warsh tried to tamp down any notion that the central bank is growing comfortable with sticky inflation. He says the target of limiting overall price hikes to 2% per year remains in effect. Scott Horsley, NPR News, Washington.
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