Dr. Adli Kandah
The Federal Reserve’s decision to keep its policy rate within the 3.50%–3.75% range was hardly a surprise to financial markets. What was more striking, however, was the degree of dissent accompanying the decision. Nine of the 12 voting members supported keeping rates unchanged, while three members — equivalent to 25% of the voting committee — preferred a 25-basis-point increase. That is not merely a statistical detail. It reveals that one-quarter of the Fed’s voting policymakers now see inflation risks as more pressing than the risks of a slowdown in economic activity. The correct reading of the decision, therefore, is not that the Fed has shifted toward monetary easing, but rather that it has chosen to wait while keeping the door open to further tightening.
From a purely economic perspective, the decision to hold rates can be defended, but it is difficult to characterize it as risk-free. The Fed is confronting an economy in which contradictory signals are emerging. The labor market has begun to lose momentum: the US economy added only around 57,000 jobs in June, while the unemployment rate remained at 4.2%. Revisions to earlier employment data also indicated that the labor market had been weaker than previously thought. This gives the central bank a reason to avoid adding further monetary tightening to an economy already showing signs of moderation.
At the same time, however, inflation remains well above the Fed’s 2% target. The Personal Consumption Expenditures price index, the Fed’s preferred inflation gauge, stood at around 4.1% in May, while core inflation was approximately 3.4%. Core inflation, in other words, remained about 70% above the central bank’s target. Given that Fed officials continue to expect inflation to remain above target for some time, declaring victory over inflation would clearly be premature.
This is precisely where the difficulty of the decision lies. Monetary policy operates with a time lag. Raising interest rates today does not lower inflation tomorrow, just as keeping rates elevated for too long can weaken investment, consumption and employment several months down the road. The Fed is therefore balancing two asymmetric risks: tightening too aggressively and pushing the economy toward a sharp slowdown, or easing too early and allowing inflation to become more deeply embedded in the expectations of households, businesses and financial markets.
From the perspective of the traditional Taylor Rule, which links the policy rate to inflation, deviations from the inflation target and the output gap, the current environment does not provide a single mechanical answer. Inflation remains substantially above target, pushing monetary policy toward higher rates, while weakening labor-market conditions pull in the opposite direction. The decision to hold rates can therefore be interpreted as an attempt to buy time rather than as a declaration that the tightening cycle is over.
But the most important aspect of the Fed’s decision may not be the 3.50%–3.75% rate itself. It is the number three out of 12. When 25% of voting members favor a rate increase, the disagreement within the committee is no longer simply about the pace of future rate cuts. It is a disagreement over whether additional tightening is already warranted. More importantly, the dissent this time was concentrated in one direction: toward higher rates. That gives it greater significance when assessing the future path of monetary policy.
Markets do not price only the current decision; they price the distribution of probabilities around future decisions. A rate hold can therefore be more hawkish than it initially appears. If investors believe the Fed will soon cut rates, a single decision to hold could push bond prices higher and yields lower. But if investors come away believing that the Fed remains prepared to raise rates again, then today’s hold becomes less important because the focus shifts to the future policy path.
That helps explain the market reaction. Rather than interpreting the decision simply as a victory for monetary easing, investors began repricing the interest-rate curve. Yields on some shorter-dated Treasury securities declined, while longer-term yields moved higher, with the 30-year Treasury yield rising above 5.2%. This is an important signal: investors are not interpreting the rate decision as evidence of a sustained decline in interest rates. Instead, they are demanding a higher term premium to compensate for inflation, fiscal and policy uncertainty, and longer-term risks.
The same logic was reflected in equities. The S&P 500 fell by around 1.5%, the Nasdaq declined by approximately 1.7%, and the Dow Jones dropped about 2.2% in a volatile session. At first glance, such a reaction may appear inconsistent with a decision not to raise interest rates. In fact, it is perfectly rational. Markets are not concerned only with the current level of interest rates; they are concerned about whether their previous expectations of falling rates were too optimistic. When investors reprice that path, the valuations of companies that are particularly sensitive to the cost of capital tend to fall, especially technology and growth stocks.
The implications for the US dollar are equally complex. The currency cannot be assessed simply on the basis of its one-day reaction to the Fed decision. The dollar is currently caught between two opposing forces. On one side, the possibility that US interest rates remain elevated for longer — or even rise again — supports the dollar. On the other, a weakening labor market and the prospect of lower inflation could revive expectations of rate cuts and place downward pressure on the currency. The coming months may therefore bring greater volatility in foreign-exchange markets as investors reassess their expectations with every new inflation and employment release.
This is where the implications for Jordan become particularly important, although they operate through a different mechanism. The Jordanian dinar’s peg to the US dollar makes US monetary policy an important external variable for the Central Bank of Jordan. That does not mean, however, that the Central Bank should mechanically replicate every Federal Reserve decision. Jordan’s monetary policy has its own domestic objectives and constraints. Nevertheless, maintaining the attractiveness of dinar-denominated assets, protecting foreign-exchange reserves and preserving confidence in the exchange-rate regime all make the interest-rate differential with the US dollar an important consideration.
The Central Bank of Jordan’s main policy rate currently stands at around 5.75%, compared with a US policy-rate range of 3.50%–3.75%. The differential between Jordan’s policy rate and the upper end of the US range is therefore approximately 200 basis points. This provides an important buffer for Jordan’s exchange-rate regime by giving dinar-denominated assets a higher yield than comparable dollar assets while the exchange rate remains stable.
This differential, however, should not be regarded as a fixed number. If the Federal Reserve resumes raising rates, pressure on the Central Bank of Jordan to preserve an adequate interest-rate differential will increase. If, on the other hand, the Fed begins a sustained easing cycle, the Central Bank will have greater room to lower rates gradually, provided domestic conditions allow it.
Jordan enters this phase from a relatively strong monetary position. The Central Bank’s foreign-exchange reserves have exceeded $26 billion, while domestic inflation has remained close to 2%, and real GDP growth reached approximately 2.9% in the first quarter. These figures provide the Central Bank with a degree of monetary stability, but they do not eliminate the country’s larger challenge: public debt and the cost of servicing it.
This is where one of the most important channels of transmission from US monetary policy to Jordan becomes visible. Higher global interest rates do not necessarily put immediate pressure on the dinar’s exchange rate, but they raise the cost of capital, increase the cost of refinancing existing debt and raise the yields investors demand when purchasing government securities. With government debt standing at roughly JD49.5 billion, including the holdings of the Social Security Investment Fund, every sustained increase in global borrowing costs becomes a fiscal issue as much as a monetary one.
The relationship between the Federal Reserve and the Jordanian dinar therefore contains an important paradox. Higher US interest rates may be negative for Jordan through their impact on financing costs, but they can simultaneously support dinar stability because a stronger dollar enhances the attractiveness of dollar-denominated assets and reduces exchange-rate risks associated with dollar-linked liabilities. The impact of US monetary policy on Jordan is therefore not linear: it raises financing costs on one side while strengthening monetary stability on the other.
It would therefore be a mistake to argue that the Fed’s decision to hold rates automatically means that the time has come for the Central Bank of Jordan to cut rates. Monetary policy does not operate in such a mechanical manner. The Jordanian decision should take into account domestic inflation, credit growth, liquidity conditions, foreign-exchange reserves, deposit flows, the interest-rate differential with the dollar and debt-servicing costs before determining the appropriate direction.
For now, the most rational strategy for Jordan is likely to be one of patience and close monitoring rather than rapid action. If US inflation declines sustainably, the labor market weakens and the probability of US rate cuts increases, the Central Bank of Jordan will have greater room to reduce rates gradually without undermining exchange-rate stability. If, however, US inflation remains elevated and the Fed resumes tightening, the priority will be to preserve the attractiveness of the dinar, maintain domestic liquidity and safeguard monetary stability.
The greater paradox is that the Fed’s latest decision, although a rate hold, may actually have increased uncertainty in the global economy rather than reduced it. Markets now face a more divided Federal Reserve, inflation that remains above target, a labor market losing momentum, energy prices capable of reigniting inflationary pressures, and elevated long-term bond yields. Together, these factors make the path of US monetary policy considerably more complicated than the headline policy rate alone suggests.
For Jordan, the most important lesson is therefore not the interest-rate decision taken at the latest US meeting, but the need to prepare for multiple scenarios. Dinar stability depends on an integrated framework of foreign-exchange reserves, market confidence, monetary policy and fiscal discipline, rather than on simply mirroring Federal Reserve decisions. At the same time, Jordan cannot ignore Washington because the global financial system remains heavily anchored to the US dollar, and any sustained change in US asset yields ultimately feeds into the cost of capital across the world.
The Federal Reserve has bought itself more time, but it has not given markets more certainty. That may be the most important message from the July meeting. The decision to hold rates was defensible given the weakening labor market, but it will prove to have been the right decision only if inflation continues to decline. If it does not, the Fed will find itself facing the same question from a more difficult position: should it accept the cost of raising rates and slowing the economy, or accept the cost of allowing inflation to become more deeply entrenched?
In monetary policy, as in financial markets, the cost of being wrong often matters more than the interest-rate level itself. What the Fed has done this time is postpone the harder decision. Markets, however, have already begun pricing the possibility that this decision may come sooner rather than later.
For Jordan, the appropriate response is neither to assume that the Fed will cut rates nor to fear that it will raise them. It is to build a fiscal and monetary framework capable of absorbing both scenarios. The real challenge is not the US interest rate by itself, but Jordan’s ability to sustain growth, create jobs and attract investment in a world where the cost of capital may remain structurally higher than it was during the years preceding the COVID-19 pandemic.
The Fed Holds Rates — But Markets Are Reading Beyond the Decision
