US Federal Reserve holds interest rates steady despite surging inflation
The United States Federal Reserve has held interest rates steady, even as chairman Kevin Warsh said inflation remained “too high”. He insisted that politics played no part in the central bank’s decision not to continue raising rates days before crucial midterm elections.
The 12-member Federal Open Market Committee (FOMC) voted 10-2 to hold rates at a target range between 3.75% and 4%, citing the need for more data in the fight against inflation, after having hiked for the first time in three years at its previous meeting in September.
Two members of the committee, Federal Reserve governor Lisa Cook and Cleveland Fed president Beth Hammack, dissented, calling instead for an immediate quarter-point rate hike.
“Energy and related prices have moved higher again in recent weeks, and our job is to ensure that relative price changes in some sectors do not broaden out across the economy,” Warsh told reporters.
Still, he said the FOMC needed more information in the coming weeks to “determine the policy stance appropriate to ensure a timely return of inflation to the 2% goal”.
The committee is scheduled to meet again in early December.
‘Politics played no role’
The central bank has missed its inflation target for more than five years, with households and businesses battered by sustained price increases.
US President Donald Trump’s war on Iran, launched in late February, has sent energy prices rocketing and fuelled domestic inflation, as have his wide-ranging tariff policies.
Price rises have also been driven by an investment boom in artificial intelligence (AI) technology and the building of huge data centres to support it.
The decision comes six days before the November 3 midterm elections, in which the Democratic Party is seeking to wrest control of both houses of Congress from Trump’s Republicans.
Trump’s handling of the economy has been a key issue throughout the campaign, with working-class households struggling to make ends meet despite largely stable overall economic growth.
US consumer inflation came in hotter than expected in September, clocking in at 3.7%, edging back towards a three-year high established in May.
“Politics played no role in the decision,” said Warsh, who has insisted that he supports the Fed’s independence despite repeated attacks on the institution by Trump since he took office.
Speaking to broadcaster CNBC after the Fed’s meeting, US Treasury Secretary Scott Bessent said he and Trump had “great confidence” in Warsh.
“I have great confidence in Chair Warsh to steer the Fed between the right combination of growth and inflation because what you don’t want to do is cause enough of a growth slowdown that energy consumption would drop,” he said.
‘Strong’ economic growth
The Fed said yesterday that economic activity in the US was expanding at a “strong” pace, upgrading its language from the FOMC meeting six weeks earlier.
At his press conference, Warsh questioned whether the AI-led investment boom was fuelling inflation.
“Is the economy running too hot? Is the economy running too strong? That isn’t the judgment of most of my colleagues.”
In a significant move, he also announced that the Fed would be reducing the number of times it sets interest rates over the next few years.
It will continue to meet eight times a year in 2027 and 2028, but will set interest rates only seven times in 2029 and six times in 2030.
“Getting policy right involves assessing near-term developments at timely, regular and information-rich intervals,” Warsh said.
“But it’s equally important we reserve time and space as an intellectually diverse group for strategic deliberations, for thinking anew about big questions, looking out over longer time horizons.”
‘Don’t understand the logic’
Wendy Edelberg, senior fellow at the Brookings Institution, told AFP before the meeting that a decision to hold after raising rates in September was potentially contradictory, given that the labour market – the subject of the Fed’s other mandate – had been largely stable.
“In terms of the economics of it, I don’t totally understand the logic.
“If there was a reason to raise interest rates at the last meeting, I think that there’s just as compelling an economic reason to raise interest rates at this meeting.”
The Fed has a dual mandate to maintain maximum employment while keeping inflation to its long-term target.
It achieves this goal largely using one tool: the key interest rate. Raising rates tends to cool inflation but can also dampen economic activity; lowering them can spur economic activity but also fuel inflation.
The US unemployment rate has been largely stable around 4.2% over the past year, with job growth mostly in positive territory, albeit driven by only a few sectors.
Other advanced economies have also been grappling with high inflation. Canada’s central bank raised its key rate yesterday to 2.5%, its first hike since July 2023.
– AFP