Fed holds rates, says more data will help next decision

Federal Reserve officials left interest rates unchanged and reiterated their commitment to containing inflation without offering a clear signal they might raise rates at their next meeting in December.

But Fed Chairman Kevin Warsh, in a press conference that followed the decision, said officials have “made clear our readiness to act as circumstances require, and we have shown our willingness to act.”

The Federal Open Market Committee voted 10-2 to hold its benchmark federal funds rate in a range of 3.75% to 4%. Governor Lisa Cook and Cleveland Fed President Beth Hammack dissented, preferring to raise rates by a quarter percentage point.

Though he dismissed the notion the US economy was beginning to overheat, Warsh highlighted a number of factors pointing to stronger-than-expected economic activity, including healthy consumer spending and solid business investment.

As a result, he said, the discussion among officials at this week’s policy meeting was centered on inflation.

“It’s our responsibility to get inflation down,” Warsh said. “That’s the reason the FOMC’s discussion over the last couple of days focused mainly on the price stability side of our remit.”

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In their post-meeting statement, officials said they hoped incoming data in the coming weeks would help inform their next decision.

“The accumulation of more information will help the committee determine the policy stance appropriate to ensure a timely return of inflation to the committee’s 2% goal,” policymakers said Wednesday. “The committee will deliver price stability.”

Financial Conditions

Warsh also spoke about measures that track how easy or difficult it is for firms and households to borrow money — a concept known as financial conditions. In the past he’s suggested financial conditions were accommodative, but on Wednesday he said they had tightened.

“Market participants are becoming somewhat more discerning in their capital allocations, and while overall financial conditions are tighter, I’m unwilling and unable to call them tight,” he said.

Short-dated US Treasury yields fell while the rate on longer tenors rose after Warsh’s press conference, with investors focusing in part on his comments regarding financial conditions becoming tighter.

While traders maintained bets officials will raise rates in December, they trimmed wagers on additional hikes in 2027. Futures markets are no longer fully pricing three more hikes this cycle.

Follow the reaction in real time on Bloomberg’s TOPLive blog

The decision to hold rates comes less than a week before the November midterm elections. Amid widespread discontent over the economy, Democrats are favored to win a majority in the House of Representatives and have a polling edge in several key races for the Senate.

There’s was no shortage of data since the September meeting supporting concerns over inflation. The consumer price index rose in September at its fastest pace in five months. That was driven largely by higher energy prices connected to the Iran war, but the report also showed broad-based inflation across goods and services.

“Inflation is too high,” Warsh said. “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.”

Fresh Data Coming

Policymakers will get fresh data Thursday when the Bureau of Economic Analysis releases the September reading for the Fed’s preferred inflation gauge, the personal consumption expenditures price index.

Strong consumer spending and a crush of investment into artificial intelligence also continue to boost growth. Economists expect figures also due Thursday will show the US economy grew at a robust annualized pace of about 3.2% in the third quarter.

The post-meeting statement described economic activity as having expanded “at a strong pace,” after calling it “solid” at its prior meeting. Officials said domestic spending was “resilient.” They also reiterated the unemployment rate had changed little and inflation remained elevated.

Warsh also revealed the central bank will phase in an adjusted meeting schedule, with plans to hold rate-setting votes at seven out of eight meetings next year. In 2028, he added, two of the eight meetings will be reserved for broad discussions instead of setting interest rates.

Rollercoaster Rate Expectations

Investors’ expectations for this meeting changed drastically over the course of recent weeks. Soon after the Fed’s decision to hike interest rates in September, bets for another increase this month climbed above 70%, according to pricing in federal funds futures.

That changed after two key FOMC voting members — New York Fed President John Williams and Vice Chair Philip Jefferson — said the central bank’s September move had bought time to assess the state of the economy. The odds of a hike in investors’ eyes promptly fell below 30% and have continued to drop. They stood below 10% earlier Wednesday.

Warsh weighed in on Oct. 16, when he said “the world has broadly conformed to our expectations” since the Fed’s September meeting. Markets interpreted that as a decision not to reset investor expectations, and thus an implicit signal that officials were likely to leave rates unchanged.

The dissent by Cook comes as she continues to challenge President Donald Trump’s attempt to fire her. Administration officials have scheduled a hearing at the White House in early November to examine allegations of mortgage fraud that Cook has long denied.

Cook has said she would not be able to attend the hearing.

– Maria Eloisa Capurro (Bloomberg)