The Federal Reserve left interest rates unchanged at its July meeting, defying market expectations of a possible hike despite three regional bank presidents voting in favour of tightening monetary policy.

Fed officials Loretta Mester of Cleveland, Neel Kashkari of Minneapolis and Lorie Logan of Dallas dissented in favour of a 25 basis point increase, marking an unusual split on the Federal Open Market Committee.

Markets had priced a roughly 35 per cent probability of a rate rise ahead of the meeting, representing the greatest uncertainty over an FOMC decision in three decades. However, Chairman Kevin Warsh offered no policy guidance or explanation of the committee’s interpretation of current inflation pressures during his press conference.

Warsh made several remarks interpreted by analysts as dovish. He appeared to downplay concerns over artificial intelligence-related price pressures, questioning whether increases in memory and logic chip prices indicated “a broader inflationary dynamic or do we just focus on them because they are under the bright streetlight”.

When asked whether rising real interest rates signalled that markets expected the Fed to raise borrowing costs, Warsh instead attributed the move to economic strength, citing solid output, strong capital expenditure and steady labour markets.

The chairman also suggested that tighter market conditions could substitute for official rate action. “While at some level we haven’t done much in 42 days, the markets have done quite a bit,” he said.

Bond markets responded to the decision as a dovish signal. Short-term interest rates fell on the day despite rising energy prices, while longer-dated yields climbed, led by higher breakeven inflation compensation.

Markets are now pricing a 60 per cent probability of a rate increase at the September meeting. Warsh confirmed he would hold press conferences after each of the three remaining FOMC meetings this year.