Fed Holds Rates Steady Ahead of Midterms as Inflation Remains High

The Federal Reserve kept its benchmark interest rate unchanged on Wednesday, leaving it at approximately 3.9%. The central bank made this decision while acknowledging that inflation remains high and providing few clues about its next steps. This holds steady the cost of borrowing for consumers and businesses in the immediate term, particularly as the midterm elections approach in six days.

In a statement released after its two-day policy meeting, the Fed explained that holding rates steady allows for the accumulation of more information. This data will help determine the best policy to return inflation to the central bank’s 2% target in a timely manner. Chairman Kevin Warsh led the Fed through this decision, following a rate hike last month that marked the first increase in three years.

Warsh emphasized that politics did not influence the decision, despite the proximity to the election where cost of living is a major concern. At a news conference following the announcement, he stated, “Politics played no role in the decision. I just spent two days with my colleagues upstairs. I didn’t hear an utterance about politics.” He noted that the Fed has started to see changes in financial and credit conditions, which have tightened for some businesses and households.

Two Fed officials dissented from the decision to hold rates steady. Governor Lisa Cook and Federal Reserve Bank of Cleveland President Beth Hammack voted to raise rates by a quarter point. This marks Cook’s first dissent since her appointment to the board in 2022. Cook has faced pressure from the Trump administration, which attempted to fire her last year. The Supreme Court ruled in June that she could keep her job while litigation proceeds. Trump renewed his attempt to remove her last month by forming a committee to investigate allegations of mortgage fraud, which Cook has denied.

Higher interest rates have already impacted parts of the economy. The average 30-year mortgage rate reached a three-year high of 7.4% earlier this month before slipping slightly. According to Oxford Economics, higher mortgage rates have made home buying unaffordable for five million more Americans since the beginning of the year. These rising costs contribute to the sense that homes, cars, and other goods are becoming more expensive for consumers.

Inflation data released Thursday is expected to show continued pressure. The personal consumption expenditures price index, a key measure followed by the Fed, is forecast to have jumped 3.6% in September from a year earlier. Core prices, which exclude food and energy, are predicted to have risen 3.1%. Earlier this month, the consumer price index indicated that consumer prices rose 3.7% compared with the previous year.

The Fed’s decision comes as the U.S. economy grows at a healthy pace with unemployment low at 4.2%. Warsh stated that economic growth in the third quarter likely rose above 3%, up from 2.2% in the second quarter. Many economists argue that such solid growth indicates that interest rates are not particularly high and that the economy could withstand higher rates to combat inflation.

The Fed’s meeting is part of a busy week for central banks globally. The Bank of Canada is forecast to lift its key rate by a quarter point to 2.5% on Wednesday. Policymakers at the European Central Bank and the Bank of Japan are scheduled to meet Thursday and are expected to keep their key rates unchanged.