Lisa Cook and Beth Hammack favored a quarter-point increase at Wednesday’s meeting
The Federal Reserve left its benchmark interest rate at 3.75% to 4% on Wednesday, October 28, after raising rates in September for the first time in more than three years. The central bank’s rate-setting committee said, “Inflation remains elevated,” and renewed its pledge to deliver price stability. The goal had become more difficult because of a spike in energy prices tied to the U.S. war with Iran.
Data since the September meeting showed inflation continuing to accelerate. Consumer prices in September were 3.7% higher than a year earlier, a bigger annual increase than in the previous month. Dan North, a senior economist at the insurance company Allianz Trade, said, “That inflation line is going up, not down.”
Fed governor Lisa Cook and Beth Hammack of the Cleveland Federal Reserve Bank voted to raise rates by a quarter percentage point on Wednesday, while a majority of policymakers stood pat.
The decision came less than a week before votes are to be tallied in the midterm election, and the timing may have contributed to the Fed’s caution. North said, “It would be suspicious if there were a hike before the midterm.”
After the pause, Fed policymakers were widely expected to raise the benchmark rate at their next meeting in December, an effort intended to tamp down demand and bring prices under control.
The Fed’s benchmark rate helps establish the cost of other short-term lending, including credit cards. Longer-term interest rates are set by the bond market but can also be influenced by Fed decisions.
Mortgage rates climbed to a three-year high of 7.4% earlier this month before easing slightly. The high cost of home loans has been a drag on the housing market, which has been in a slump for the last four years.
Other parts of the economy are less sensitive to higher interest rates. Booming investment in artificial intelligence showed no sign of slowing, even as the Fed tried to restrain demand. North said, “The A.I. companies don’t care what interest rate they have to pay.” The push to build AI data centers is pushing up prices for construction materials and electronic equipment.
Consumer spending also remained resilient, fueled in part by upper-income shoppers who benefit from the rising stock market. Less wealthy families did not share that support, as their wages were not keeping pace with the rising cost of living. Average wages rose just 3% for the 12 months ending in September.
Mark Zandi, chief economist at Moody’s Analytics, said, “Lower and middle-income Americans are having a real struggle.” He added, “Their purchasing power is actually declining.” He said the strain likely explains to a large degree why people do not feel very good about the economy.
The Fed’s pause came against an uneven economic backdrop: inflation was accelerating, borrowing costs were high, housing remained weak, and lower- and middle-income purchasing power was under strain, while AI construction and upper-income spending remained resilient. Wednesday’s vote produced no change to the benchmark rate, and the next rate decision is set for December.