Fed holds rates, but borrowers face fresh warning on higher loan costs

Dubai: The US Federal Reserve kept interest rates unchanged on Wednesday, but borrowers hoping for relief received a clear warning after nearly half of policymakers signalled support for at least one rate hike later this year.

The decision leaves the Fed’s key rate at about 3.6%, keeping pressure on mortgage, car loan and credit card costs at a time when inflation has climbed to a three-year high and household budgets remain stretched.

The tone from the central bank was more aggressive than markets had expected, with nine policymakers backing higher rates this year in the Fed’s latest projections. Six of them supported two quarter-point increases, marking a major shift from March, when no official had pencilled in a hike and the committee’s central view was for one cut in 2026.

Borrowers may have to wait longer

For consumers, cheaper borrowing may not arrive soon, even though the Fed has paused for now. Higher rates tend to lift the cost of mortgages, auto loans and credit card balances, while also making it harder for businesses to expand and hire.

The shift also puts the Fed on a potential collision course with President Donald Trump, who has pushed for lower rates and criticised the previous Fed leadership for not cutting deeply enough.

New Fed chair Kevin Warsh, appointed by Trump, used his first policy meeting to pull back from the central bank’s previous forward guidance. The Fed also dropped language that had suggested its next move could be a rate cut.

Warsh did not submit his own forecast for rates, although he encouraged other officials to do so. He has previously criticised the projections for potentially locking the Fed into a specific policy path.

Inflation keeps Fed cautious

Inflation has accelerated to 4.2% since the Iran war began on February 28, lifted mainly by higher fuel costs linked to the conflict. Even if a peace agreement holds and oil prices fall further, officials remain concerned that inflation pressures were already visible across services and goods before the war.

Prices for clothes, dental care and child care had been rising, while inflation has stayed above the Fed’s 2% target for five years.

Warsh told reporters that officials remain focused on restoring price stability.

"We've missed (on inflation) for five years and we're gonna fix that," he said.

The Fed’s challenge is that inflation is still too high, while the labour market has also strengthened enough to weaken the case for cutting rates. Employers added 172,000 jobs in May, marking a third straight month of solid job gains.

Markets react to hawkish tilt

Wall Street moved lower after the Fed’s projections were released, with the S&P 500 falling 1.4% as investors priced in the risk that rates could stay higher for longer.

Warsh said he is setting up five task forces to review how the Fed communicates, what data it uses, and how it evaluates inflation, with the goal of ensuring the central bank is "clear-eyed and focused on the future."

- With inputs from AP.