The Federal Reserve opted to hold interest rates steady on Wednesday, defying pressure from three regional bank presidents who voted for a quarter-point hike, as the ongoing war with Iran injects fresh uncertainty into the inflation outlook. Chair Kevin Warsh defended the decision, calling the economy “impressively resilient” despite what he termed “recent shocks” from surging energy prices tied to the conflict.
Markets reacted sharply. The Dow Jones Industrial Average shed more than 1,100 points, its worst single-day drop since April 2025, while the S&P 500 fell 1.5 percent and the Nasdaq dropped 1.7 percent. The 10-year Treasury yield spiked to 4.7 percent early Thursday, and the 30-year yield hit 5.2 percent—its highest level since 2007—before both eased later in the day. The volatility underscored the delicate balance the Fed must strike as the war in the Strait of Hormuz roils global energy markets.
New inflation data released Thursday showed the personal consumption expenditures price index, the Fed’s preferred gauge, dipped to 3.7 percent in June from 4.1 percent in May. The decline offered a glimmer of stability, but the price of West Texas Intermediate crude has climbed above $80 a barrel after trading below $70 in late June, reflecting renewed hostilities between Washington and Tehran. A mid-June pause in fighting gave way to tit-for-tat strikes, and Iran continues to restrict shipping in the key waterway.
Warsh faced dissents from the presidents of the Cleveland, Dallas, and Minneapolis Feds, all of whom argued for a rate increase. Former Cleveland Fed President Loretta Mester told The Hill she would have likely sided with the hawks, saying, “To get inflation back down to 2 percent, you’re going to need policy a little restrictive.” She added, “I don’t believe the Fed funds rate is restrictive right now on the economy.”
Warsh reiterated that the central bank’s primary goal is returning inflation to 2 percent and noted it is monitoring whether energy price shocks are “broadening” across the economy. But the decision to hold rates for the fifth straight meeting, coupled with that message, left traders confused. Callie Cox, chief market strategist at Ritholtz Wealth Management, described Warsh’s press conference as “pretty opaque,” adding that “there were more assurances and bits of color about the meeting” but not “a lot of meat.”
Daniel Alpert, executive chair at Westwood Capital, said the market is in a “holding pattern” because “the war is continuing. So, the market doesn’t really know what to make of the situation.” He noted the bond market “tends to trade on news,” complicating the Fed’s ability to align its signals with market expectations.
The broader economy is showing signs of cooling. Gross domestic product grew at an annual rate of 1.5 percent in the second quarter, down from 2.1 percent in the first quarter, according to new data from the Bureau of Economic Analysis. The slowdown, combined with the war-driven energy uncertainty, has analysts watching closely for whether the Fed’s patience with rates will be rewarded or prove too cautious.
The Trump administration’s military engagement in Iran continues to ripple through financial markets, with energy costs directly tied to the conflict’s trajectory. As both sides resume strikes, the Fed faces the challenge of calibrating policy against a backdrop that few central bankers have navigated before.
