US Federal Reserve Keeps Rates Unchanged Despite Elevated Inflation

 

Washington: The Federal Reserve kept its key rate unchanged Wednesday at about 3.9% despite stubbornly high inflation, as Chairman Kevin Warsh suggested its policies are already showing signs of having an impact.

The Fed said “inflation remains elevated” in the statement it released after its two-day meeting, and added that holding off on a rate increase allows “the accumulation of more information” that will inform the Fed's next steps.

The Fed raised its benchmark rate last month by a quarter-point for the first time in three years, defying President Donald Trump’s demands for rate cuts, in an effort to bring inflation back to its 2% target more quickly. The Fed is tasked by Congress to combat inflation, and it does so by lifting rates to slow borrowing and spending and reduce price increases.

 

While Warsh declined to provide much insight into what the Fed may do next, most economists still expect the central bank to hike its key rate another quarter-point at its next meeting Dec. 8-9. Wall Street investors now see the odds of an increase then at nearly 85%, according to CME Fedwatch.

“It's likely going to take one more (hike) from the Fed to get interest rates into restrictive territory,” where they can slow inflation, said Michael Reynolds, vice president for investment strategy at Glenmede, a wealth advisory firm.

The Fed’s decision comes just six days before a midterm election that has focused heavily on concerns around the cost of living and affordability. Consumers have generally soured on an economy weighed down by more expensive gas, groceries, and clothing, among other items. Warsh denied the election played a part in the Fed’s staying pat.

“Politics played no role in the decision," he said at a news conference following the announcement. “I just spent two days with my colleagues upstairs. I didn’t hear an utterance about politics.”

 

Instead, Warsh underscored the Fed's determination to bring inflation back to its target.

“Energy and related prices have moved higher again in recent weeks,” he said. “And our job is to ensure that relative price changes in some sectors do not broaden out across the economy.”

“Don’t mistake a pause for a truce; the battle against inflation is far from over,” Diane Swonk, chief economist at KPMG, said in a note to clients.

 

Warsh faces plenty of challenges in getting inflation back to target. Some of the forces pushing up prices — specifically the rapid buildout of artificial intelligence infrastructure and higher energy prices — may not be easily tamed by higher interest rates.

Still, Warsh said the “overwhelming consensus” among Fed officials is what they’ve done “is starting to work some,” noting that credit conditions “tightened for some businesses and households.”

He said specifically that as large tech firms rely more on borrowing to build data centers, higher rates will have a greater ability to cool that investment.

“Do interest rates matter?” Warsh asked. "I believe they do, and I don’t think they’re divorced from the rest of the economy.”

 

Parts of the economy are being hit by higher rates, which were lifted by market forces, even before the Fed hiked last month. The average 30-year mortgage rate reached a three-year high of 7.4% earlier this month, though it has since slipped a bit. Higher mortgage rates have made buying a home unaffordable for 5 million more Americans since the beginning of the year, according to Oxford Economics, a consulting firm. Over time, Fed rate hikes can make mortgages, auto loans, and credit card borrowing more expensive, adding to Americans’ sense that things like homes and cars are getting pricier.