Explained: The US Federal Reserve maintained the status quo on Wednesday, keeping interest rates unchanged in the 3.75%–4% range despite stubbornly high inflation. The decision was in line with market expectations.
The Fed’s rate decision was approved by a 10–2 vote, with Lisa D. Cook and Beth M. Hammack dissenting. While a pause was widely anticipated, the decision raises a key question: with inflation remaining sticky and elevated, why did the Fed not opt for a rate hike instead?
Why did the US Fed Reserve decide to not hike rates after the FOMC meeting?
The Federal Reserve Committee decided to keep the interest rate unchanged in support of the Federal Reserve’s dual mandate. The FOMC prioritised to continue its policy of maintaining ample reserves in the banking system.
“Economic activity is expanding at a strong pace. While uncertainty remains elevated owing, in part, to geopolitical developments, domestic spending has been resilient. Productivity growth is strong, and capital investment is robust. Job gains have kept pace with the workforce, and the unemployment rate has changed little,” read the FOMC statement.
The “committee will deliver price stability”. The accumulation of more information would aid the FOMC to determine the policy stance appropriate to ensure a timely return of inflation to the committee’s 2% goal, mentioned by the US Fed in its statement.
What did US Fed chair Kevin Warsh say?
Fed Chairman Kevin Warsh began his post-meeting press conference by noting a number of factors which indicated stronger-than-expected economic activity linked to healthy consumer spending and solid business investment. He underlined that the discussion at this week’s policy meeting remained focused around price pressures.
“It’s our responsibility to get inflation down,” Warsh said. “That’s the reason the FOMC’s discussion over the last couple of days focused mainly on the price stability side of our remit.”
Will Fed rate be hiked in December?
Without giving any clear hint of a US Fed’s strategy for December, Warsh said, “We’ve made clear our readiness to act as circumstances require, and we have shown our willingness to act.”
Politics play no role in Fed decision, says Warsh
The US Fed decision has come just six days before a midterm election, which is likely to revolve around concerns linked to cost of living and affordability. Addressing the press conference, Kevin Warsh rejected the possibility of any influence of politics in the US Fed’s decision.
“Politics played no role in the decision,” he said at a news conference following the announcement. “I just spent two days with my colleagues upstairs. I didn’t hear an utterance about politics.”
Warsh denied that consumers would lose faith in the Fed’s ability to get inflation back to its 2% target, given its decision to forego a rate hike. “There is no soft inflation target,” he said.
