Warsh pauses rate hikes as September inflation hits 3.7%

The Federal Reserve voted on Wednesday to keep interest rates at their current levels, marking the central bank's final policy decision before the midterm elections. The committee made this choice despite inflation accelerating from 3.4% in August to 3.7% in September. This increase was driven largely by higher costs for gasoline, diesel, and crude oil, which have placed a strain on consumer budgets and are now affecting other parts of the economy.

In September, the committee voted unanimously to raise rates, the first increase since 2023. Wednesday's vote broke that streak of unanimity. Governor Lisa Cook and Cleveland Fed President Beth Hammack dissented in favor of a rate hike. This was the first time in her career that Cook voted against the majority. President Donald Trump is currently attempting to remove Cook from her position.

Fed Chairman Kevin Warsh announced that the central bank will reduce the number of meetings where it votes on rates from eight to seven next year. The schedule will shrink by two more meetings in 2028. Warsh stated that this change would improve the quality of the bank's decisions. In a post-decision statement, the committee noted that inflation remains elevated. It said that accumulating more information will help determine the appropriate policy stance to return inflation to its 2 percent goal.

During a news conference, Warsh described real economic activity as moving in the right direction but acknowledged that inflation is too high. He said the Fed's job is to prevent relative price changes in specific sectors from spreading across the entire economy. The committee described domestic spending as resilient and economic activity as expanding at a strong pace. It noted that uncertainty remains elevated due to geopolitical developments. Economists at Morgan Stanley indicated that the current data suggests the Fed may continue tightening in the future.

Political pressure was evident as voters cited rising prices for housing and energy as their main concerns. A recent NBC News poll showed that two-thirds of Americans view soaring gas prices, triggered by the Iran war, as a serious problem. More than half of those surveyed said economic conditions had changed the groceries they buy. Trump's approval rating stood at 27% regarding the cost of living and 29% regarding the Iran war.

Warsh stated that the midterms and politics played no role in the decision. He defended his colleagues against recent claims by Trump that board members were hostile to the president. Warsh described the deliberation as a serious and sober discussion. The committee's decision sets the stage for a possible rate increase at the December meeting.