Fed holds interest rates steady in last decision before midterms
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The US Federal Reserve left interest rates unchanged on Wednesday during its last board meeting before the midterm elections, keeping rates at one of the highest pre-election levels seen in over 20 years.
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Two out of 12 board members voted against the pause, preferring to raise rates by a quarter point this meeting, the Fed board said in a statement.
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Last month, Fed officials raised rates for the first time since 2023, citing rising inflation, bringing rates to a range of 3.75% to 4%. Inflation has hovered for years above the Fed’s target rate of 2%, and for most of this year, the annualized inflation rate has remained above 3%.
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Though inflation rose higher in September, going from 3.4% in August to 3.7%, the pause signals the central bank is taking a wait-and-see approach ahead of the midterms next week.
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During a press conference on Wednesday afternoon, the Fed chair, Kevin Warsh, told reporters that the upcoming election played no role in deliberations.
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“Politics played no role in the decision,” he said. “I didn’t hear an utterance about politics.” The central bank is still focused on price stability, he said, but emphasized that “the information that we receive over the coming period will help us determine where want policy to be”.
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“The period right in front of us is information rich, there’s a lot that’s happening in the world, my colleagues and I are keen to take notice of it,” he said.
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September’s rate hike infuriated Donald Trump, who said that “interest rates in the United States should be 1% or less”.
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Warsh declined to comment on a remark from Donald Trump that, besides Warsh, the Fed board is full of Democratic-appointed members who “would like to see the country do badly”, but said that the latest meeting was “a heck of a family fight”.
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“I’m honored to be here, and I’m honored to be chairman of this group,” he said.
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Interest rates determine the cost of interest for loans, including for credit cards, mortgage and some savings accounts.
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During times of high inflation, raising rates can slow price increases. Multiple Fed leaders have suggested in recent weeks that the central bank has room for a pause, even if most Fed economists are predicting one more rate hike before the end of the year.
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“The hikes do not need to come at consecutive meetings, but they should be in place in an acceptable period of time,” the Fed governor Christopher Waller said earlier this month.
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The proximity of the election also made it more likely that the Fed will “not take any radical action”, said Nicholas Economides, a professor of economics at the NYU Stern Business School.
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“Even if the Fed were to do something radically different, the economy would not have time to adjust before the elections,” he said.
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Rising prices this year have largely been driven by war in the Middle East with Iran.
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Oil prices have soared with the closure of the strait of Hormuz, a crucial passageway for trade. Inflation rose last month to its highest level since the spring, while oil traded briefly above $117 a barrel earlier this week, its highest price in more than six months. The higher cost of living is expected to play a crucial role in the upcoming midterm elections that will determine which party will control Congress.
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Across multiple polls, the economy has been cited as the top issue for voters. By itself, hiking interest rates cannot solely address inflation caused by supply shocks, Economides said.
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Raising rates is helpful for when the economy is too hot, or when demand outpaces supply, but can be counterproductive otherwise. “If inflation is caused by supply factors, it doesn’t make sense to try to cure it by increasing interest rates because it won’t work,” he said.
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“It will slow down the economy at a time in which you don’t want it to slow down. On Wednesday, Warsh also announced upcoming changes to the Fed’s eight board meetings it conducts annually.
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Starting in fall 2027, only seven of those meetings will be convened to set interest rates. That number will go down to six in 2028, with the other meetings dedicated to “broad monetary policy” when the change is implemented.
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