What happened
The Federal Reserve voted 9 to 3 on Wednesday to leave the federal funds rate unchanged in a range between 3.5 percent and 3.75 percent, holding steady for another meeting as policymakers weighed sticky inflation against a softening jobs market. The decision came at the July meeting of the Federal Open Market Committee, the panel that sets US interest rates.
The split was unusually wide. Three regional Fed presidents, Beth Hammack of Cleveland, Neel Kashkari of Minneapolis and Lorie Logan of Dallas, dissented and preferred to raise the target range by a quarter of a percentage point to guard against inflation drifting higher.
Kevin Warsh, the current chair of the Federal Reserve, told reporters after the decision that the committee is not on a preset path. He signalled that future moves would depend on incoming data on prices and employment.
The next rate decision is due after the FOMC meeting on 15 and 16 September, giving markets six weeks of data to digest before the Fed moves again.
Why it matters
The Fed sets the price of borrowing for the worlds largest economy, and its decisions ripple far beyond America. When US rates hold, it keeps the dollar firm and shapes the cost of everything from car loans in Ohio to government borrowing in London.
A divided vote matters too. Three dissents is a public signal that some policymakers fear inflation is not yet beaten. That makes a cut later this year less likely and keeps borrowing costs higher for longer than many households and businesses had hoped.
For the UK, the Fed casts a long shadow. The Bank of England often finds it hard to cut rates much faster than the Fed without weakening the pound, which would push up the cost of imported goods and fuel. A cautious Fed effectively ties the Banks hands.
Explained simply
Think of the Federal Reserve as the driver of a very heavy lorry on a long hill. Ease off the brake too soon and it races away; brake too hard and it stalls. Right now the driver is holding the brake exactly where it is.
Interest rates are the main tool a central bank uses to control how fast an economy grows. When rates are high, borrowing is expensive, people spend less, and price rises slow down. When rates are low, money is cheap, spending speeds up, and prices can climb.
By holding at 3.5 to 3.75 percent, the Fed is keeping steady pressure on the economy, not pressing harder, but not letting up either. It wants to be sure inflation is falling for good before it eases.
The three dissenters are the passengers shouting that the lorry is still going too fast and the driver should brake harder. Their votes do not change todays outcome, but they hint at where the argument inside the Fed is heading.
What it means for you
If you hold a US or global tracker fund inside a pension or a Stocks and Shares ISA, a steady Fed is broadly reassuring, because it removes the risk of a surprise rate rise that tends to knock share prices. Many FTSE 100 trackers also feel the effect, because a firmer dollar flatters the overseas earnings of big London-listed multinationals.
Savers should note that a Fed on hold makes it less likely that global rates fall quickly. Easy-access savings accounts paying around 4 percent at major UK banks are unlikely to tumble in the next few months while US rates stay put.
Anyone shopping for a fixed-rate mortgage will find that lenders price partly off long-term rate expectations. With the Fed signalling no rush to cut, five-year fixes are unlikely to fall sharply from current levels near 4.5 percent in the coming weeks.
The bigger picture
The Fed has now held rates for several meetings, a pause that reflects an economy that refuses to slow neatly. Inflation has cooled from its peak but energy costs, stirred by Middle East tensions, keep threatening to push it back up.
The key date to watch is the September meeting. If jobs data weakens and inflation keeps easing, the doves could win and a cut becomes possible. If prices climb, the three dissenters may soon be a majority. Either way, the era of steady rates could end this autumn.
