Fed holds interest rates steady in last decision before midterms

The US Federal Reserve left interest rates unchanged during its last board meeting before the midterm elections, keeping them at a range of 3.75% to 4%. Two out of 12 board members voted against the pause, preferring to raise rates by a quarter point this meeting.

Last month, Fed officials raised rates for the first time since 2023, citing rising inflation. Inflation has hovered above the Fed's target rate of 2% for years, with the annualized rate remaining above 3% for most of this year.

Though inflation rose higher in September from 3.4% in August to 3.7%, the pause signals the central bank is taking a wait-and-see approach ahead of the midterms next week.

Political considerations

During a press conference Wednesday afternoon, Fed chair Kevin Warsh told reporters that the upcoming election played no role in deliberations. 'Politics played no role in the decision,' he said. 'I didn't hear an utterance about politics.'

Warsh declined to comment on a remark from Donald Trump that the Fed board is full of Democratic-appointed members who 'would like to see the country do badly', but described the latest meeting as 'a heck of a family fight'.

Inflation drivers

Rising prices this year have largely been driven by war in the Middle East with Iran. Oil prices have soared with the closure of the Strait of Hormuz, a crucial passageway for trade. Oil traded briefly above $117 a barrel earlier this week, its highest price in more than six months.

Nicholas Economides, a professor of economics at NYU Stern Business School, noted that hiking interest rates cannot solely address inflation caused by supply shocks. 'If inflation is caused by supply factors, it doesn't make sense to try to cure it by increasing interest rates because it won't work,' he said.

Future policy changes

Warsh also announced upcoming changes to the Fed's eight annual board meetings. Starting in fall 2027, only seven meetings will be convened to set interest rates, decreasing to six in 2028. Other meetings will be dedicated to 'broad monetary policy'.

Multiple Fed leaders have suggested the central bank has room for a pause, though most economists are predicting one more rate hike before the end of the year. The proximity of the election made it more likely that the Fed would 'not take any radical action', Economides said.