The Federal Reserve opted to keep its benchmark interest rate unchanged at approximately 3.9% on Wednesday, despite ongoing elevated inflation. Fed Chair Kevin Warsh indicated that the central bank's current policies are beginning to show effects, and more information is needed to guide future decisions.
In its post-meeting statement, the Fed acknowledged that "inflation remains elevated" and stated that holding the rate steady will allow for "the accumulation of more information" to ensure inflation returns to the central bank’s 2% target.
Last month, the Fed raised its key rate for the first time in three years, a move that defied President Donald Trump's calls for rate cuts. The Fed is mandated by Congress to combat inflation, typically by increasing rates to slow borrowing and spending, thereby reducing price pressures.
Analysts suggest the Fed is likely to implement another quarter-point rate hike at its next meeting on December 8-9. Market expectations, as tracked by CME Fedwatch, place the probability of such an increase at nearly 85%. Michael Reynolds, vice president of investment strategy at Glenmede, believes "it’s likely going to take one more (hike) from the Fed to get interest rates into restrictive territory."
The Fed's decision comes shortly before midterm elections, where concerns about the cost of living and affordability have been prominent themes. Consumer sentiment has reportedly soured due to rising costs for essentials like gas and groceries.
Warsh asserted that political considerations did not influence the decision, stating, “Politics played no role in the decision.” He added that discussions among Fed officials focused solely on economic factors.
The central bank faces challenges in curbing inflation, particularly from factors like the expansion of artificial intelligence infrastructure and elevated energy prices, which may be less responsive to interest rate adjustments.
Despite these challenges, Warsh noted an "overwhelming consensus" among Fed officials that their actions are having an effect, citing evidence of which can be seen in tighter credit conditions for some businesses and households. He specifically highlighted that higher rates are poised to influence investment in areas like data center construction, a significant undertaking for large tech firms.
"Do interest rates matter? I believe they do, and I don’t think they’re divorced from the rest of the economy,” Warsh stated.
The impact of higher rates is already being felt in certain sectors. The average 30-year mortgage rate reached a three-year high of 7.4% earlier this month, contributing to homeownership becoming unaffordable for an estimated 5 million more Americans this year, according to Oxford Economics. These higher borrowing costs on mortgages, auto loans, and credit cards are amplifying concerns about rising prices for major purchases.
On Thursday, the personal consumption expenditures price index, a key inflation gauge for the Fed, is expected to show a 3.6% increase in September from a year earlier, up from 3.4% in August. Core prices are projected to rise 3.1%, a slight increase from the previous month. This follows recent data showing the consumer price index rose 3.7% in September compared to the previous year.
Warsh expressed confidence that the Fed's commitment to its 2% inflation target remains credible, asserting, “There is no soft inflation target.”
Two Fed officials, Governor Lisa Cook and Cleveland Fed President Beth Hammack, dissented from the decision, advocating for a quarter-point rate increase. This marks Cook's first dissent since her appointment in 2022.
Cook has been a target of political scrutiny, including an attempted dismissal by the Trump administration that was ultimately blocked by the Supreme Court, underscoring the Fed's traditional independence.
President Trump has previously criticized the Fed's rate hikes, though his criticism has often been directed at the committee rather than Warsh, whom he appointed.
The Fed's meeting occurs amidst a busy week for global central banks, with the Bank of Canada having already raised its rate by a quarter point. Policymakers at the European Central Bank and the Bank of Japan are also expected to maintain their current rates.
Supported by a healthy economic growth rate and a low unemployment rate of 4.2%, the Fed is navigating a complex economic landscape. Warsh projected that economic growth in the July-September quarter likely exceeded 3%, an increase from the 2.2% growth in the prior quarter. Many economists argue that this solid growth indicates the economy can withstand further rate increases to combat inflation.