As most market participants anticipated, the Federal Reserve held interest rates steady, but its second monetary policy meeting under Chair Warsh leadership immediately exposed internal divisions over the timing of a rate hike.

On Wednesday, July 29th, Eastern Time, the Fed announced that the Federal Open Market Committee (FOMC) would keep the federal funds rate target range unchanged at 3.50% to 3.75%. This marks the fifth consecutive monetary policy meeting in 2026 where the FOMC has held rates steady, following three consecutive rate cuts at the end of last year.

This decision aligned with the expectations of most market participants. As of Tuesday's close, the CME FedWatch Tool showed futures markets pricing in nearly a 70% probability of no rate hike this week, with a slightly over 30% chance of a 25-basis-point increase. The probability of rates remaining unchanged at the September meeting was below 24%, and by December, the chance of no change was less than 9%, while the likelihood of at least two 25-basis-point hikes was approximately 58%.

The statement released following the decision largely mirrored the language from the previous meeting in June. Similar to last time, the statement reiterated the Fed's commitment to achieving price stability. It once again acknowledged that the Middle East conflict is causing high economic uncertainty, that inflation remains elevated partly due to rising energy prices, and that the economy is expanding at a steady pace with the unemployment rate remaining broadly unchanged.

The statement directly copied the previous assessment of inflation, stating that "inflation remains elevated relative to the Committee's 2% objective, reflecting supply shocks that have contributed to price increases in specific sectors, including energy."

Compared to the previous statement, the only major change was in the voting results: among the 12 FOMC voters this year, nine favored keeping the rate unchanged, while three dissented. Nick Timiraos, a journalist known as the "New Fed Whisperer," commented that this marks the first time since 2016 that three voters have cast dissenting votes on the same side of a policy change.

Timiraos wrote that this division highlights the growing pressure on the Fed, two months into Chair Warsh tenure, to take action against inflation, which has now exceeded the target for five consecutive years.

Ahead of the decision, Timiraos noted that if one or two committee members voted against a pause, it would clearly signal the buildup of hawkish pressure within the FOMC. Historically, Fed chairs could appease potential dissenters by adding hawkish or dovish language to the statement or by hinting at a more likely move at the next meeting. However, Warsh has explicitly stated his intention to abandon these tools, meaning he may lack sufficient means to keep the disagreement under wraps.

The Biggest Change in the Statement: One-Quarter of FOMC Voters Supported a 25-Basis-Point Hike This Meeting

According to the meeting statement, the three FOMC members who voted against the rate decision are all regional bank presidents. They are Cleveland Fed President Beth Hammack, Minneapolis Fed President Neel Kashkari, and Dallas Fed President Lorie K. Logan. The statement showed that all three supported a 25-basis-point rate hike at this meeting.

This means a quarter of this year's FOMC voters favored taking action immediately. The dot plot released after the previous meeting showed that among the 18 Fed policymakers who provided rate projections, nine expected at least one 25-basis-point hike this year, with six of those expecting at least two such hikes.

The voting outcome of this week's FOMC meeting confirms the "civil war" within the Fed that Chair Warsh predicted before and after assuming his role.

At the previous FOMC meeting, all voters, including Warsh, agreed to keep the policy rate unchanged, marking the first unanimous vote on the rate decision in nine months.

However, with the Middle East tensions continuously driving up oil prices and new inflationary pressures emerging, the Fed faces fresh challenges after signaling at its last meeting that the likelihood of a rate hike now outweighs a cut.

In a piece published on Monday, Timiraos argued that this week's FOMC meeting was a crucial test for Warsh entire strategy. If the Fed chooses to hold rates steady without specifying conditions for action, the question arises: Warsh has repeatedly emphasized over the past two months that the Fed will not tolerate inflation exceeding its target, but if it stands pat without providing any triggers for action, the market will naturally question whether these strong statements have any teeth.