Fed Holds Rates at 3.75% to 4% Ahead of Midterm Elections

The Federal Reserve kept its benchmark interest rate at 3.75% to 4% on Wednesday, leaving the cost of short-term borrowing unchanged for consumers and businesses. The central bank’s decision means that credit card rates and other variable loans will remain at their current levels for the next month, providing a temporary pause in the upward pressure on monthly payments for millions of borrowers.

The hold follows a rate increase in September, the first in over three years. Since that move, inflation has continued to rise. Consumer prices in September climbed 3.7% from the previous year, a higher annual rate than in the preceding month. The Fed attributed this persistence largely to a spike in energy prices connected to the ongoing U.S. war with Iran. In its statement, the rate-setting committee noted that inflation remains elevated, reaffirming its commitment to price stability.

Two members of the committee dissented from the decision to hold rates. Fed Governor Lisa Cook and Beth Hammack, president of the Cleveland Federal Reserve Bank, voted to raise rates by a quarter percentage point. The majority of policymakers, however, chose to stand pat. Analysts suggest the timing of the decision, which came less than a week before the midterm election, may have influenced the committee’s caution. Dan North, a senior economist at Allianz Trade, described the current inflation trajectory as moving in the 'wrong way,' noting that the line is going up rather than down.

Economic conditions remain divided. While the Federal Reserve’s rate has a direct impact on short-term lending, longer-term rates such as mortgages are also influenced by Fed policy. Mortgage rates hit a three-year high of 7.4% earlier this month before easing slightly. This high cost of borrowing has continued to weigh on a housing market that has been in a slump for four years. In contrast, investment in artificial intelligence has remained strong regardless of interest rates. North observed that A.I. companies are largely indifferent to the cost of capital, a dynamic that is driving up prices for construction materials and electronic equipment.

Consumer spending has stayed resilient, supported by wealthier households benefiting from the stock market. However, average wages rose only 3% over the 12 months ending in September. This wage growth has not kept pace with the rising cost of living for lower and middle-income families. Mark Zandi, chief economist at Moody's Analytics, stated that the purchasing power of these Americans is actually declining. He noted that this financial strain likely explains why many people do not feel positive about the economy.

Policymakers are now expected to raise the benchmark rate at their next meeting in December. The move would aim to dampen demand and bring prices under control. The Fed will release its next set of economic projections and rate decision after the midterm election results are finalized.