Fed Holds Rates Steady as Inflation Sticks Above 3%

The Federal Reserve kept its benchmark interest rate unchanged on Wednesday, defying internal pressure to raise borrowing costs further. The decision comes as inflation remains stubbornly high, with the Personal Consumption Expenditures price index expected to exceed 3% for September. This is the first time since the Fed raised rates by a quarter of a point in September that the committee has chosen to hold steady.

Two of the twelve voting members dissented against the freeze. Board Governor Lisa Cook and Cleveland Fed President Beth Hammack argued that the federal funds rate should have increased by 0.25 percentage points. Cook’s dissent marks the first time she has voted against an FOMC decision since joining the board in 2022. She has also faced legal challenges from President Donald Trump over her mortgage disclosures, a dispute currently before the Supreme Court.

The dissenters represent a minority view within the current group. Dallas Fed President Lorie Logan and Minneapolis Fed President Neel Kashkari, who opposed the rate hike in July, voted in favor of the freeze this time. The split highlights internal debate over how aggressively to tighten policy to bring inflation down to the 2% target.

The Fed’s statement described economic activity as expanding at a strong pace. This is a more optimistic assessment than the steady pace cited in September. The Atlanta Fed’s GDPNow model projects third-quarter growth at a 3.4% annual rate, which would be the highest level in the past year. Growth is being driven by robust consumer spending and increased investment in the artificial intelligence sector.

Despite the strong growth, economists warn that inflation pressures are spreading beyond energy prices and the impact of the war in Iran. Core inflation, which excludes food and energy, is also expected to remain above 3%. The Fed noted that it needs more data to determine when it can return inflation to its target without overly slowing the economy.

The decision was made six days before the November 3 midterm elections. Some market analysts suggested the Fed may have wanted to avoid a rate hike on the eve of a major political contest. The market had priced in less than a 10% chance of a rate increase for this meeting.

Federal Reserve Chair Kevin Warsh will hold a press conference at 2:30 p.m. Eastern Time to address the policy path. Futures markets currently price in a high probability of another rate hike at the December meeting. Some forecasters anticipate one or two additional increases in 2027 if inflation does not cool quickly.

The next step for the Fed will depend on how rapidly inflation moderates. With the economy growing faster than expected and price pressures persisting, the committee faces a complex balance between supporting growth and controlling costs.