Fed holds interest rates steady as inflation remains high

The Federal Reserve held its benchmark rate at 3.75%–4.00% yesterday, though two members called for an immediate hike to curb inflation.

Fed Chair Kevin Warsh said earlier rate increases were beginning to affect borrowing, but the central bank needs more information before deciding its next move. This morning’s latest personal consumption expenditures (PCE) report is also expected to point to continued price increases.

Inflation remains above target
The Fed aims to bring inflation down to 2%. However, consumer prices rose 3.7% in September from a year earlier, and higher energy prices fueled concerns about further price increases.

The central bank raised its benchmark rate by 0.25 percentage points last month, the first hike in three years. Higher interest rates make loans more expensive, encouraging households and businesses to spend less and helping slow inflation.

Higher rates hit homebuyers and business
The impact is already visible in the housing market. The average 30-year mortgage rate reached 7.4% earlier this month, making homeownership more expensive for millions of Americans. Higher borrowing costs could also slow business investment, including spending on artificial intelligence infrastructure.

The two who dissented
Two Fed officials, Lisa Cook and Beth Hammack, opposed Wednesday’s decision and supported another quarter-point increase, highlighting concerns about persistent inflation.

Warsh rejected suggestions that the upcoming midterm elections influenced the decision, saying the Fed remained focused on economic conditions.

Many economists expect another rate increase at the Fed’s December 8–9 meeting, although officials have not confirmed their next move.

Also, the Fed plans to change its meeting schedule in 2027. It will continue to hold eight policy meetings that year, but one meeting will focus on long-term strategy rather than include a vote on interest rates. The central bank plans to hold two such strategy-focused meetings in 2028.

The Wall Street Journal points to a trade-off in reducing the frequency of rate decisions.

A longer review period could help policymakers evaluate economic trends more comprehensively.

On the other hand, it could delay the Fed’s response to sudden developments, such as a sharp market downturn.

The Fed must balance controlling inflation against the risk that higher borrowing costs could slow economic growth.