Wednesday’s Federal Reserve decision left its key interest rate unchanged, even as last month’s inflation data showed inflation accelerating further beyond the central bank’s 2% goal. With a 10-2 vote, officials chose to await additional economic indicators before deciding whether to implement a second consecutive quarter-point hike following September’s adjustment to the federal funds rate, according to the Federal Open Market Committee’s statement.
The Federal Open Market Committee said in a statement that it would “deliver price stability” and that “Inflation remains raised,” the FOMC said, adding that “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.”
Two policymakers, Governor Lisa Cook and Cleveland Fed President Beth Hammack, dissented in favor of raising the main rate by 0.25 percentage point. Hammack and other policymakers have voiced concern that inflation will speed up and prove more difficult to curb without a timely increase in borrowing costs.
Inflation Concerns
Central bank officials engaged in a heated discussion about inflation during their two-day gathering, according to Fed Chair Kevin Warsh. “We just came out of a heck of a family fight — serious, sober discussion,” he said. The discussion came after data on consumer and wholesale prices in September showed inflation speeding up and prolonging its more than five-year period above the Fed’s target.
The consumer price index rose at a 3.7% annual rate in September, higher than expected. The 12-month gain in the producer price index of 6.3% last month also exceeded forecasts. Higher energy prices, pushed up by the U.S.-Israel war with Iran, have spurred price increases across much of the economy and show no sign of declining.
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Economic Outlook
Despite inflation concerns, the FOMC painted a bright picture of the economy. “Economic activity is expanding at a strong pace,” the committee said. The job market is also healthy, with unemployment at 4.2% in September and ranging between 4.1% and 4.3% since March.
Warsh said that “on the employment side of the Fed’s dual mandate, conditions are quite positive.” The jobless rate is lower than a year ago, and payroll growth is noticeably above last year’s pace. Traders in interest rate futures increased the odds that policymakers will raise the main interest rate by a quarter point in December to 85% from 75% on Tuesday.
For now, the watchword among policymakers on the topic of inflation is apparently “wait and see.” Warsh said that “politics had no role in the decision” and that he didn’t hear any discussion about politics during the FOMC meeting. The federal funds rate is currently set at a range from 3.75% to 4%, and the next scheduled meeting is December 8-9.
The extended period of rising prices has eroded real incomes and undermined household budgets, influencing the outlook of voters with the approach of the November 3 midterm elections. Warsh said that “it’s our responsibility to get inflation down” and that the Fed is committed to delivering price stability.
