Dive Brief:
- The Federal Reserve on Wednesday held the benchmark interest rate steady despite data showing that inflation last month accelerated further beyond the central bank’s 2% goal.
- Policymakers in a 10-2 vote decided to collect more data before considering whether to follow up their quarter-point tightening in September with a second increase in the federal funds rate, the Federal Open Market Committee said in a statement while pledging to “deliver price stability.” Its next scheduled meeting is Dec. 8-9.
- “Inflation remains elevated,” 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.
Dive Insight:
Hammack and other policymakers in recent months have voiced concern that inflation will speed up and prove more difficult to curb without a timely increase in borrowing costs.
Indeed, central bank officials during their two-day gathering engaged in a heated discussion about inflation, Fed Chair Kevin Warsh said in a post-meeting press conference.
“We just came out of a heck of a family fight — serious, sober discussion,” he said.
Policymakers met 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. The price for a barrel of Brent crude oil has surged 80% during the past year to $115.75.
The extended period of rising prices has eroded real incomes and undermined household budgets, influencing the outlook of voters with the approach of the Nov. 3 midterm elections.
“It’s our responsibility to get inflation down,” Warsh said.
Bond traders since late September have done some tightening for the Fed, pushing up the yield on the benchmark 10-year Treasury note above 5%.
“Since our policy action in September we have started to see some changes in financial and credit conditions," Warsh said.
“Market participants are becoming somewhat more discerning in their capital allocations and, while overall financial conditions are tighter, I’m unwilling and unable to call them tight,” he said.
Warsh and the FOMC painted a bright picture of the economy.
“Economic activity is expanding at a strong pace,” the committee said. “While uncertainty remains elevated owing, in part, to geopolitical developments, domestic spending has been resilient.
“Productivity growth is strong, and capital investment is robust,” the FOMC said. “Job gains have kept pace with the workforce, and the unemployment rate has changed little.”
The job market is healthy, Warsh said. Unemployment was 4.2% in September and has ranged between 4.1% and 4.3% since March, giving the FOMC no apparent reason for forgoing a rate increase.
“On the employment side of the Fed’s dual mandate, conditions are quite positive,” Warsh said. “The jobless rate is lower than a year ago and payroll growth is noticeably above last year’s pace.”
Traders in interest rate futures on Wednesday increased the odds that policymakers will raise the main interest rate by a quarter point in December to 85% from 75% on Tuesday, according to CME Group’s FedWatch tool. The federal funds rate is currently set at a range from 3.75% to 4%.
Since taking the top post at the central bank in May, Warsh has repeatedly vowed to quell inflation, saying that “inflation is a choice.”
For now, though, with the elections less than a week away, the watchword among policymakers on the topic of inflation is apparently “wait and see.”
“Politics had no role in the decision,” Warsh said, referring to the FOMC vote. “I just spent two days with my colleagues upstairs — I didn’t hear an utterance about politics.”
