Fed Holds Rates as Inflation and Weak Hiring Hit Workers

The Federal Reserve voted 10-2 Wednesday to keep its benchmark interest rate between 3.75% and 4%. Households and businesses must still contend with elevated prices and a labor market adding few jobs. Two officials wanted another increase. The majority chose to wait for more information, while credit conditions had already tightened for some businesses and households after the previous rate hike.

Who Sets the Price of Credit

Fed Chair Kevin Warsh said the committee wanted more information to determine the policy needed for “a timely return of inflation to the 2 percent goal.” Lisa Cook, a Fed board of governors member, and Beth Hammack, president of the Federal Reserve Bank of Cleveland, dissented in favor of a quarter-point increase. Hammack also backed an increase in late July, joining two colleagues in the minority when the central bank kept rates steady.

Wednesday’s decision came about six weeks after officials raised rates by a quarter point, the first increase in more than three years. Traders had priced in a 92.8% chance of a hold by Wednesday afternoon, according to CME’s FedWatch tool; CNN reported a 91% implied chance. The committee’s decision shapes borrowing costs across the economy, though people and businesses have little direct say in its meetings.

Warsh said he had “started to see some changes” in financial and credit conditions since the September rate increase. “They have tightened for some businesses and households, much as we would expect,” he said. He also said market participants were becoming “somewhat more discerning in their capital allocations.” Warsh called himself “unwilling and unable” to describe financial conditions as “tight,” even as he said they were moving toward “a longer or durable period of economic growth and price stability.”

Prices Up, Hiring Weak

Consumer prices rose 3.7% over the past year, while the Fed’s preferred inflation gauge remained 50% above its target, CNN reported. Inflation had risen during the year amid the Iran war, adding economic and political pressure in the midterm cycle. The labor market offered little comfort: the U.S. economy added 29,000 jobs in September, below expectations, and revised figures showed 60,000 fewer jobs added over the previous two months than earlier estimates. The economy lost 10,000 jobs in July and had lost jobs in seven of the previous 16 months. Unemployment stood at 4.2%, with economists describing the market as “low hire, low fire.”

Housing and rent costs rebounded in September. Other services cost more than expected, too. Investment in data centers and artificial-intelligence technology was cited as contributing to higher prices for electricity, building materials, labor, smartphones and laptops. Higher bond yields can also slow the economy and inflation; yields rose after the previous rate increase, briefly reaching multi-decade highs, before slipping back toward mid-September levels.

Election Pressure, Policy Risk

CNN reported that Narayana Kocherlakota, the former Minneapolis Fed president, told Matt Egan the Fed hesitated to raise rates partly to insulate itself from criticism by President Donald Trump. CNN also noted that the Fed has changed rates during election periods in the past. Warsh rejected the suggestion that politics influenced Wednesday’s decision. The Hill reported that the inflation outlook and rate decision came in the run-up to midterm elections.

The Fed’s earlier inflation call still hangs over its current choices. During the recovery from the pandemic, officials described inflation as a “transitory” supply shock related to the Russia-Ukraine war and supply-chain disruptions, then raised rates at a historic pace, including three consecutive increases of three-quarters of a percentage point. Consumer prices eventually reached an annual peak of 9.1%, the highest in four decades. CNN reported that renewed escalation of the Iran war or Russia-Ukraine war could leave the Fed facing a possible half-point increase at its December meeting. Rate increases take time to affect the economy, while sharper increases can hurt financial markets and the economy; increases in 2022 helped send stocks to their biggest annual decline since the financial crisis and stalled the housing market, though the economy did not enter a recession.

Warsh described the committee’s discussion in a PBS NewsHour interview as “a heck of family fight, a serious, sober discussion,” and said, “I think we came to the right policy decision for this moment.” He said he heard no mention of politics during two days with his colleagues and planned to reduce the number of rate-setting meetings starting next year. The committee’s next decision still rests on its reading of incoming data. September personal consumption expenditures price index data are scheduled for release at 8:30 a.m. EST Wednesday.