Fed Holds Rates at 3.9% Ahead of Midterms

The Federal Reserve held its benchmark interest rate steady at approximately 3.9% on Wednesday, a decision made just six days before the U.S. midterm elections. The central bank cited the need for more data before adjusting policy, leaving Wall Street investors to price in a potential rate hike in December.

Inflation has remained above the Fed's 2% target, prompting the bank to raise rates for the first time in three years last month. That move defied President Donald Trump's calls for lower rates. The Fed's statement noted that holding steady allows officials to gather information necessary to ensure a timely return of inflation to target levels.

Chairman Kevin Warsh addressed reporters after the two-day policy meeting, stating that the decision was driven by economic data rather than the electoral calendar. "Politics played no role in the decision," Warsh said. "I just spent two days with my colleagues upstairs. I didn't hear an utterance about politics."

Two Fed officials dissented from the vote. Governor Lisa Cook and Federal Reserve Bank of Cleveland President Beth Hammack voted in favor of a quarter-point increase. This marks Cook's first dissent since her 2022 appointment by President Joe Biden. The Trump administration has renewed efforts to remove Cook, citing mortgage fraud allegations she has denied, following a Supreme Court ruling in June that allowed her to remain in office while litigation continues.

Market conditions show the impact of higher rates. The average 30-year mortgage rate hit a three-year high of 7.4% earlier this month. Oxford Economics reports that 5 million more Americans have lost affordability for home purchases since the start of the year due to these rising costs.

The personal consumption expenditures price index is scheduled for release Thursday. Analysts forecast a 3.6% year-over-year increase in September, up from 3.4% in August. Core prices, which exclude food and energy, are expected to rise 3.1% compared to the 3% growth seen the previous month.

Warsh indicated that financial and credit conditions have tightened for businesses and households, influencing the decision to pause. He noted that while some inflation drivers like energy prices and artificial infrastructure costs are hard to control with rates, the economy remains robust. U.S. unemployment stands at 4.2%, and Warsh suggested growth in the third quarter likely exceeded 3%, up from 2.2% in the second quarter.