The Federal Reserve held its benchmark interest rate unchanged at 4.5 percent on September 1, following a two-day meeting of the Federal Open Market Committee that left analysts divided on the central bank next move. Chair Jerome Powell cited mixed inflation data as the reason for pausing, noting that core Personal Consumption Expenditures inflation fell to 2.8 percent in July from 3.1 percent in June, while services inflation remained elevated at 4.2 percent. "The direction of travel is encouraging, but we are not yet at the point where we can declare victory on inflation," Powell said during the post-meeting press conference. "We will continue to be guided by incoming data, not by market expectations." ## Market Reaction and Expectations The decision disappointed market participants who had priced in a 25 basis point cut with 68 percent probability, according to CME FedWatch tool data. The yield on the 10-year Treasury note rose 12 basis points to 4.38 percent, while the 2-year yield, more sensitive to rate expectations, jumped 18 basis points to 4.15 percent. The Dow Jones Industrial Average fell 285 points, or 0.7 percent, in the 30 minutes following the announcement. The S&P 500 retreated 0.4 percent, and the NASDAQ Composite dropped 0.6 percent. "The market was positioned for a cut, and the hold creates a repricing event," said Priya Misra, head of global rates strategy at TD Securities. "We now expect the first cut in November, assuming October inflation data continues the disinflationary trend." ## Inflation Trajectory Remains Uncertain The August jobs report, released on September 1, showed the economy added 187,000 nonfarm payrolls, slightly above the 175,000 forecast. The unemployment rate ticked up to 4.1 percent from 4.0 percent, while average hourly earnings rose 0.3 percent month-over-month and 3.9 percent year-over-year. Housing costs continued to present a challenge for the inflation outlook. The Owner Equivalent Rent component of the Consumer Price Index, which tracks what homeowners would pay to rent their own homes, rose 0.5 percent in July, its largest monthly increase since February 2024. "Shelter inflation is the last mile problem for the Fed," said Ian Shepherdson, chief economist at Pantheon Macroeconomics. "Until we see meaningful deceleration in rent growth, the committee will remain cautious about cutting too aggressively." ## Global Central Banks Diverge The Fed decision came as other central banks moved in different directions. The European Central Bank cut its deposit rate by 25 basis points to 3.25 percent on August 29, citing weakening manufacturing data in Germany and France. The Bank of Japan raised its benchmark rate to 0.5 percent in July and signaled another increase may come before year-end. The divergence in policy paths has widened interest rate differentials, pushing the dollar index to 104.3, its highest level since March. A stronger dollar increases the cost of dollar-denominated debt for emerging market economies, potentially tightening financial conditions in countries already struggling with slow growth. The next FOMC meeting is scheduled for October 28-29, with a Summary of Economic Projections and dot plot update expected alongside the policy decision.