Federal Reserve pauses rate hikes as inflation climbs to 3.7%

The Federal Reserve voted Wednesday to keep interest rates unchanged in its final policy decision before the midterm elections. The central bank held steady even as the annual inflation rate accelerated from 3.4 percent in August to 3.7 percent in September. Rising costs for gasoline, diesel, and crude oil drove much of the increase. Many economists say these higher fuel prices are now spreading into other sectors of the economy.

In a post-decision statement, the committee acknowledged that inflation remains elevated. The Fed said it needs more information to determine the appropriate policy stance for returning inflation to its 2 percent goal. The personal consumption expenditures price index, the Fed's preferred gauge, is scheduled for release Thursday. Morgan Stanley economists expect that index to reach 3.7 percent, suggesting the central bank may not be finished tightening.

The vote was not unanimous. Governor Lisa Cook and Cleveland Fed President Beth Hammack dissented in favor of a rate increase. This marked the first dissent of Cook's career. President Donald Trump is currently attempting to fire Cook. In September, the committee voted 12-0 to raise rates, marking the first increase since 2023.

Chairman Kevin Warsh announced that the central bank will reduce the number of rate-voting meetings from eight to seven next year. The schedule will shrink by two additional meetings in 2028. Warsh stated this change would improve the quality of the Fed's decisions.

Warsh offered a mixed assessment of the economy at a news conference. He noted that real activity is pointing in the right direction, but inflation is too high. The committee described economic activity as expanding at a strong pace and domestic spending as resilient. They noted that uncertainty remains elevated due to geopolitical developments.

Voters have told pollsters that rising prices for housing and energy are their chief concerns. A recent NBC News poll found 66 percent of Americans consider soaring gas prices a serious problem. More than half said economic conditions have changed the groceries they buy. Warsh said politics played no role in the decision, calling the committee's debate a serious and sober discussion.

Warsh defended his colleagues against recent claims by the president that board members are hostile to the administration. He believes the committee reached the right decision for the current moment. With inflation well above the target, the announcement sets the stage for a possible rate increase at the December meeting.