By Howard Schneider
WASHINGTON, Oct 28 (Reuters) – The Federal Reserve held interest rates steady on Wednesday, as expected, opting to delay any changes to borrowing costs until after next week’s US midterm elections and awaiting further data on the path of inflation.
In a 10-2 decision, the US central bank said it would maintain its benchmark interest rate within the current 3.75%-4.00% range while acknowledging that inflation “remains elevated,” upgrading its assessment of the economy, and hinting that further rate hikes may be coming depending on the performance of inflation.
“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,” the rate-setting Federal Open Market Committee said in its latest policy statement. “The Committee will deliver price stability.”
Fed Chairman Kevin Warsh, speaking in a press conference following the end of the policy meeting, did not offer guidance on the outlook for monetary policy, but acknowledged that the central bank had not achieved price stability. “We’re working on it,” he said.
Warsh, who took over as head of the central bank in May, added that he does not believe “in prejudging meetings” and noted that “a lot of things can happen, so I’m not going to be able to share with you my musings about what happens when this group gets together six weeks from now.”
Fed Governor Lisa Cook, currently being targeted by President Donald Trump for removal from the central bank, cast her first dissent on a central bank policy decision, favoring a quarter-percentage-point rate hike. Cleveland Fed President Beth Hammack, a consistently hawkish voice, also dissented in favor of the same rate increase.
The Fed’s latest policy statement is a notable change from the September 15-16 meeting, with a hint of the sort of forward guidance Warsh has said he wants to avoid.
The central bank’s assessment of the economy was upgraded to “strong” from the “solid” expansion seen as of the September meeting, while investment was still described as robust and job gains were viewed as keeping pace with the workforce.
Market reaction was muted, with US stocks paring gains slightly after the decision. US Treasury yields extended their rise, with the 10-year Treasury note yield at 5.042%. Short-term interest-rate futures rose a bit, as traders pulled back a bit on bets of Fed rate hikes ahead.
“A hold isn’t relief,” said Kelly Brown, the CEO of Ampersand, a deposit management company. “It’s the Fed telling Main Street to wait. With inflation still at 3.7%, and oil above $100 a barrel, businesses can’t count on borrowing costs coming down anytime soon.”
FEARS THAT INFLATION IS BROADENING
The outcome of this week’s meeting was widely expected after top Fed officials indicated they saw no rush to raise rates again following the quarter-percentage-point increase approved last month, despite inflation data in the meantime that was stronger than forecast and concerns that price pressures are broadening across the economy.
Energy costs remain high, including for diesel fuel, which is a key input for shipping, agriculture, and other industries. Inflation and the cost of living in general have been central to the political races that will determine whether Trump’s Republican Party remains in control of both houses of Congress on November 3, or whether Democrats move into leadership positions and gain more robust oversight powers, including over the Fed.
Financial markets are still pricing in a couple of additional rate hikes in the coming months, though with slightly less conviction than before Warsh spoke on Wednesday. Pricing shows about an 80% chance of a rate hike at the Fed’s December 8-9 meeting, with another likely by March.
Inflation, which is currently around a percentage point above the Fed’s target, has shown little progress in recent months.
The US central bank has missed its inflation target for five and a half years, a fact that has left some officials worried that businesses and households are becoming accustomed to faster price increases and may plan for them in ways that will make inflation harder to control.
(Reporting by Howard Schneider and Michael S. Derby; Additional reporting by Ann Saphir and Michael S. Derby; Editing by Paul Simao)
