Fed Holds Rates as Its Policy Squeezes Households

The Federal Reserve voted 10-2 to keep its benchmark interest rate at 3.75 percent to 4 percent, while Chair Kevin Warsh said officials need more information before settling on a policy to bring inflation back to their 2 percent goal. Households and businesses still face the financial conditions shaped by the central bank: Warsh said some had felt those conditions tighten since the September rate increase.

Who Sets the Rate

Warsh told reporters the committee believes “the accumulation of more information will help it determine the policy stance appropriate to ensure a timely return of inflation to the 2 percent goal.” The Federal Open Market Committee kept the benchmark rate unchanged, but two officials voted for another quarter-point increase: Fed board of governors member Lisa Cook and Federal Reserve Bank of Cleveland's president Beth Hammack. Hammack also supported a rate hike in late July, alongside two colleagues who opposed holding rates steady.

Warsh said Wednesday that he had “started to see some changes” in financial and credit conditions since the Fed raised rates in September. “They have tightened for some businesses and households, much as we would expect,” he said. “Market participants are becoming somewhat more discerning in their capital allocations.” The committee’s policy is reaching people and businesses outside its meeting room. Warsh said he was “unwilling and unable” to call conditions “tight,” but argued they were moving “in the direction of achieving a longer or durable period of economic growth and price stability.”

Traders put the chance of a hold at 92.8 percent as of Wednesday afternoon, according to the CME FedWatch tool. The decision came as markets expected it. That didn't ease the strain of higher prices or interest rates on household budgets.

The Household Bill

Annual inflation, measured by the consumer price index, climbed from 3.4 percent in August to 3.7 percent in September. Energy shocks from the U.S.-Iran and Russia-Ukraine wars continued to hamper the economy, while gas prices recorded their largest monthly jump since March. A gallon of regular gas averaged roughly 23 cents less than a month earlier, yet remained about $1.21 more expensive than a year earlier, according to AAA.

Warsh acknowledged the pressure. “I am not going to be the guy who says that oil prices haven't gone up, and when [Americans] fill up their tank, they don't see it,” he said. Ted Rossman, a finance analyst at Money Management International, said, “Inflation remains uncomfortably high, and the rising cost of living and elevated interest rates are combining to squeeze household budgets.”

The Bureau of Economic Analysis planned to release September personal consumption expenditures price index data on Thursday. The Cleveland Fed projected the Fed’s preferred inflation measure would show prices up 3.6 percent from September 2025. PCE inflation eased from 3.7 percent in July to 3.4 percent in August. The CPI showed energy prices made their largest monthly jump from August to September, as the eight-month Iran war continued with no clear end in sight.

More Data, More Decisions

Several Fed officials had recently called for patient evaluation of economic data, signaling they could put off the next rate hike until early December, when the FOMC is scheduled to meet for the last time in 2026. Twelve of 18 officials forecast one more rate hike this year, on top of September’s quarter-point increase, according to the committee’s quarterly economic projections released last month. Rossman said it “seems very likely” the Fed would raise rates by a quarter point in early December. Seema Shah, the chief global strategist at Principal Asset Management, said inflation expectations remain anchored and second-round effects are limited, leaving policymakers room to wait; she expected increases in December and “early 2027.”

Higher prices also created political problems for Republicans in the midterms, as Democrats sought to take control of Congress for the lion’s share of Trump's final two years in office. Warsh said politics played no part in the rate decision: “I just spent two days with my colleagues upstairs. I didn't hear an utterance about politics. I didn't hear a reference to politics, elections, what's happening in the next week or so.” He made no commitment about the next decision, but said the committee was “working on” lowering inflation. “We will deliver price stability,” he said. “No ifs, ands or buts, and that continues to be the case.”