Fed Pauses at 3.7% Inflation

The Federal Reserve voted on Wednesday to hold interest rates steady, marking its final monetary policy decision before the midterm elections. The committee chose to pause despite inflation accelerating from an annual rate of 3.4% in August to 3.7% in September. Rising costs for gasoline, diesel, and crude oil drove much of that increase, with economists noting that the strain on consumers is now spreading to other sectors of the economy.

In its post-decision statement, the Fed acknowledged that inflation remains elevated. The committee stated that accumulating more information would help determine the appropriate policy stance to return inflation to its 2 percent goal. The personal consumption expenditures price index, the Fed's preferred gauge, is due Thursday and is expected to match the 3.7% figure. Morgan Stanley economists suggested that the Fed may not be finished tightening, indicating that future rate hikes will depend on incoming data.

The vote was not unanimous, with Governor Lisa Cook and Cleveland Fed President Beth Hammack dissenting in favor of a rate hike. This marked the first dissent of Cook's career as President Donald Trump attempts to remove her from her position. In September, the committee voted 12-0 to raise rates, a move not seen since 2023. Fed Chairman Kevin Warsh also announced a reduction in the number of rate-setting meetings from eight to seven next year, with two fewer scheduled for 2028. Warsh said the schedule change would improve the quality of the bank's decisions.

During a news conference, Warsh described real economic activity as pointing in the right direction while noting that inflation is too high. He stated that the Fed's task is to ensure that relative price changes in specific sectors do not broaden across the entire economy. The committee characterized economic activity as expanding at a strong pace and domestic spending as resilient, though it noted that uncertainty remains high due to geopolitical developments.

Political factors surrounded the decision, as voters consistently cite rising prices for housing and energy as their top concerns. A recent NBC News poll showed Trump's approval at 27% regarding the cost of living and 29% regarding the Iran war. Two-thirds of Americans called soaring gas prices a serious problem, and more than half said economic conditions had changed the groceries they buy.

Warsh stated that midterms and politics played no role in the decision. He defended his colleagues against Trump's claims that board members were hostile to the president, describing the committee's discussion as a serious, sober debate. With inflation well above the target, Wednesday's announcement sets the stage for a possible rate increase at the December meeting.