No Rate Relief: Fed Holds as Tariff Bill Arrives

The Federal Reserve's Open Market Committee voted 9-3 on Wednesday to leave its benchmark interest rate parked between 3.5% and 3.75% — a fifth straight meeting without a move, and a decision that guarantees Rhode Island borrowers another stretch of expensive mortgages, expensive credit cards and expensive car loans while the prices they pay for imported goods keep climbing.

Three of the twelve votes went the other way, and all three wanted rates higher. Beth Hammack of the Cleveland Fed, Neel Kashkari of Minneapolis and Lorie Logan of Dallas — regional bank presidents who have been the most explicit about the need to tighten — "preferred to raise the target range for the federal funds rate by ¼ percentage point at this meeting," according to the post-meeting statement. It is the first time since September 2016 that three policymakers have broken ranks in the same direction.

The reason for the split is not mysterious. Inflation has now run above the Fed's 2% target for more than five years. Annual inflation registered 3.5% in June, an improvement over May's 4.2% but nowhere near the target, and core PCE inflation climbed from 3.0% in December 2025 to 3.3% in April.

Two forces are doing most of the work, and neither is monetary policy.

The first is tariffs. The average effective tariff rate stood at 2.3 percent in January 2025; by May 2026 it had tripled to 7.2 percent, according to the Penn Wharton Budget Model, which tracks the figure monthly. That accounting has been scrambled repeatedly by litigation and improvisation — the Supreme Court ruled 6-3 on February 20 that the International Emergency Economic Powers Act does not authorize tariffs at all, after which the administration imposed a 10 percent Section 122 tariff on nearly all countries covering an estimated $1.0 trillion in annual imports, a levy that expired after 150 days on July 24 and was succeeded by Section 301 tariffs hitting roughly $949 billion in imports.

What matters for a household in Woonsocket or Warwick is the timing of the pass-through, and the timing has been merciful only by accident. Importers ate most of the cost through 2025 by drawing down inventories they had stockpiled in advance. Those inventories are gone. The Federal Reserve's own monetary policy analysis found higher average monthly price increases concentrated in goods with high import content — household appliances, consumer electronics — and by mid-2026 the delayed pass-through was expected to be substantially complete. In plain terms: the bill is arriving now.

The second force is war. The Middle East conflict that erupted on February 28 tore into oil infrastructure in Iran and beyond, and by March 6 the inflation-adjusted price of oil had risen about 50% from its pre-conflict level, hovering between $90 and $110 a barrel until a U.S.-Iran memorandum of understanding announced June 14 partially reopened the Strait of Hormuz — a waterway that carries roughly 27% of the world's seaborne crude and petroleum products. Prices fell back toward pre-war levels by late June. Then they didn't stay there. Gas has again crossed $4 per gallon.

Federal Reserve research quantified what an energy shock of that size does: fourth-quarter-over-fourth-quarter headline PCE inflation rising by 0.6 percentage points, core PCE by 0.2.

Fed Chair Kevin Warsh, sworn in May 22 and delivering his verdict on the committee's first serious test, has left no ambiguity about where he lands. Testifying before Congress on July 14, Warsh said the Fed would make high inflation "a thing of the past" and that the central bank has "no tolerance for persistently elevated inflation." He added: "There is no soft implicit target. Not on this committee's watch. There's only a target and it's 2%."

That posture forecloses the thing Rhode Island homebuyers have been waiting for. Thirty-year fixed mortgage rates have been holding just above 6.50%. Markets are now pricing in two quarter-point hikes before the end of 2026, and the committee itself penciled in one such increase in June — meaning the next move for a Rhode Islander refinancing, buying a car, or carrying a credit-card balance is more likely to be up than down.

The squeeze arrives on top of an accumulated one. The Senate Joint Economic Committee's state inflation tracker calculated that the average Rhode Island household was paying $991 more per month for the same basket of goods and services as in January 2021, and had spent $28,555 more cumulatively since then. The state's own fiscal forecasters are not projecting a rebound: the November 2025 Revenue Estimating Conference, drawing on Moody's Analytics projections, anticipated Rhode Island shedding jobs over the coming year with unemployment rising to roughly 5.3 percent.

Nationally the labor market is already buckling — the economy shed 133,000 jobs in February and averaged just 68,000 jobs per month in the first quarter — which is precisely the combination that leaves working people with no exit: weak hiring, elevated prices, and a central bank that cannot cut without conceding on inflation.

Breyon Williams, chief economist at the Groundwork Collaborative, put the blame squarely on trade and war policy in a statement issued after the decision.

"The president's reckless economic policies have done irreparable harm to working families' budgets," Williams said. "Inflation remains elevated, with no immediate relief in sight for Americans. Even Trump's hand-picked Fed chair, Wall Street sweetheart Kevin Warsh, knows the president's actions are driving up prices."

The FOMC's next meeting is September 15-16.