Three Federal Reserve officials who wanted the central bank to signal more directly this week that interest rates may eventually need to rise cited concerns about resurgent inflation stemming from the war in Iran in defending their decision to dissent against Wednesday’s policy announcement.
On Friday, the policymakers who contributed to the Fed’s most divisive meeting in decades explained their opposition to the policy statement that the central bank put out after holding rates steady at a range of 3.5 percent to 3.75 percent.
The Fed’s statement noted that: “In considering the extent and timing of 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.”
Neel T. Kashkari, president of the Federal Reserve Bank of Minneapolis, Beth M. Hammack of the Cleveland Fed and Lorie D. Logan of the Dallas Fed instead wanted the central bank to remove what they described as an “easing bias” from the statement, meaning that the central bank was signaling that a rate cut was the likeliest next move.
With the energy shock stemming from war in Iran pushing inflation sharply higher, they instead wanted the Fed to make clear that the next policy move could just as likely be an increase as a reduction depending on how the economy evolved.
Mounting opposition to rate cuts serves as a warning shot to Kevin M. Warsh, President Trump’s pick to lead the Fed. Mr. Trump has made clear he expects lower borrowing costs from the Fed under Mr. Warsh’s leadership. Jerome H. Powell, the outgoing chair, had refused to comply with the president’s demands, leading to a relentless series of attacks. Mr. Trump’s pressure campaign is why Mr. Powell has opted to stay on at the Fed as a governor after his term as chair ends May 15.
Rate decisions are made by the 12-person committee, which also includes the six other members of the board of governors, the president of the Federal Reserve Bank of New York and a rotating set of four presidents from the 12 regional banks.
On Wednesday, there were four official dissents. Stephen I. Miran, an outgoing governor at the Fed who was appointed by Mr. Trump last year, voted instead for a quarter-point reduction, as he has done since joining in September.
“I see this clear easing bias as no longer appropriate given the outlook,” said Ms. Hammack, who alongside Mr. Kashkari and Ms. Logan is a voting member on the policy-setting Federal Open Market Committee this year.
Ms. Logan made a similar argument in her statement, saying that she is “increasingly concerned about how long it will take inflation to return all the way to the F.O.M.C.’s 2 percent target.”
“The conflict in the Middle East raises the prospect of prolonged or repeated supply disruptions that could create further inflationary pressures,” she said. “At the same time, the labor market has been stable, with low unemployment and payroll job gains keeping pace with labor force growth.”
Data from the Commerce Department on Thursday showed that the Fed’s preferred inflation gauge — the Personal Consumption Expenditures price index once volatile food and energy prices are excluded — accelerated to 3.2 percent compared to the same time last year. Overall inflation, according to this gauge, notched a 0.7 percent monthly gain, or 3.5 percent on an annual basis.
Mr. Kashkari on Friday warned that a prolonged conflict that kept the Strait of Hormuz, a crucial shipping lane for global energy markets, shuttered could potentially call for a series of rate increases “even at the risk of further weakness to the labor market.”
“If this were to happen, the price shock wave could be much larger than is currently expected, driving up both inflation and unemployment in the U.S.,” he wrote in a statement on Friday. “With inflation having been elevated for almost six years and counting, I believe the F.O.M.C. would have to take very seriously the risk of an unanchoring of long-run inflation expectations.”
