Fed holds benchmark rate at 3.9% despite elevated inflation

The US Federal Reserve kept its key interest rate unchanged at about 3.9% on Wednesday, even as inflation remained elevated. Chairman Kevin Warsh said the pause will allow the central bank to gather more information before its next move.

The Fed raised its benchmark rate by a quarter-point last month, its first increase in three years. It is trying to bring inflation back to its 2% target and has defied President Donald Trump's demands for rate cuts.

One more hike expected

Most economists expect another quarter-point increase at the Fed's next meeting on Dec. 8-9. Wall Street investors 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.

Warsh said some forces pushing up prices, especially the rapid buildout of artificial intelligence infrastructure and higher energy prices, may not be easily tamed by higher interest rates. Still, he said the "overwhelming consensus" among Fed officials is that what they have done "is starting to work some," with credit conditions tightened for some businesses and households. He added 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."

Politics denied as election nears

The decision came six days before a midterm election that has focused heavily on the cost of living and affordability. Consumers have generally soured on an economy weighed down by more expensive gas, groceries, and clothing.

Warsh denied politics played a part. "Politics played no role in the decision," he said at a news conference. "I just spent two days with my colleagues upstairs. I didn't hear an utterance about politics."

Energy and related prices have moved higher again in recent weeks, Warsh said. "Our job is to ensure that relative price changes in some sectors do not broaden out across the economy."

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

Mortgage pain and dissenting votes

The average 30-year mortgage rate reached a three-year high of 7.4% earlier this month, though it has slipped a bit since. Higher mortgage rates have made buying a home unaffordable for 5 million more Americans since the beginning of the year, according to Oxford Economics.

The personal consumption expenditures price index, an inflation measure closely followed by the Fed, is due on Thursday. It is forecast to have jumped 3.6% in September from a year earlier, up from 3.4% in August. Core prices, which exclude food and energy, are forecast to have risen 3.1%, up from 3% the previous month. The consumer price index showed inflation picked up in September, with consumer prices up 3.7% from a year earlier.

Two Fed officials dissented. Fed governor Lisa Cook and Federal Reserve Bank of Cleveland President Beth Hammack voted to hike rates by a quarter-point. It was Cook's first dissent since she was appointed to the board by President Joe Biden in 2022. The Trump administration tried to fire her last year, but the Supreme Court in June ruled she could keep her job while litigation played out. No president has fired a Fed governor before. Trump renewed his attempt to remove Cook last month by setting up a committee to look into allegations she committed mortgage fraud, which she has denied. Economists said the dissents suggest there is still broad support on the rate-setting committee to lift rates further.

Warsh said that starting next year the Fed will adjust its regular meeting schedule. It will continue to hold eight policy meetings a year, but one meeting in 2027 will focus on longer-term strategy and not include a vote on interest rates. Two meetings will focus on strategy in 2028, he said. Reynolds said the changes should not make much difference to markets or the economy because the Fed can always change rates between meetings.

The Fed's meeting came in a busy week for central banks. The Bank of Canada lifted its key rate by a quarter-point to 2.5%. Policymakers at the European Central Bank and the Bank of Japan meet on Thursday and are expected to keep their key rates unchanged.