Fed Holds Rates at 3.9% as Warsh Defies Hike Expectations

Federal Reserve officials kept their key interest rate unchanged at 3.9% on Wednesday, ending a policy meeting that many investors had predicted would include a rate hike. The central bank held steady despite hot inflation data released in September, which had led Wall Street to expect a quarter-point increase to approximately 4.1%.

Chairman Kevin Warsh presided over his fourth meeting in the role, which has been defined by scrutiny of his independence from President Donald Trump. The decision comes six days before midterm elections, a period when affordability concerns dominate the political landscape. Gas prices have surged, and grocery prices remain high, adding pressure on consumers facing rising housing costs.

The average 30-year mortgage rate hit a three-year high of 7.4% earlier this month before slipping slightly to 7.32% last week. A year ago, that rate stood just under 6.2%. Oxford Economics estimates that these sharp increases have made home buying out of reach for another five million households. Further hikes by the Fed could push these costs even higher.

Several top Fed officials downplayed the likelihood of an October rate hike in recent speeches, shifting market expectations. Philip Jefferson, vice chair of the Fed's board of governors, stated that longer-term interest rates had already risen in financial markets. He added, “my colleagues and I will need to come to our own judgment, which may take more time.” Joseph LaVorgna, chief economist at SMBC Americas, argued that the Fed would avoid moving just before the vote. “The Fed doesn't want to poke the White House in the eye six days before an election,” LaVorgna said.

The meeting also raised questions about Warsh's stated preference against “forward guidance,” or clear signals about future policy moves. Economists noted that speeches from top officials this month sounded like forward guidance, even if they did not come from the chairman. Aditya Bhave, head of U.S. economics research at Bank of America, suggested that if Warsh blessed these messages, it would challenge his credibility on the issue. If he did not, a surprise hike would effectively end the practice of providing guidance.

Warsh's independence from the White House remains a focal point for markets. In September, he raised rates against Trump's preference for cuts, countering concerns from Massachusetts Sen. Elizabeth Warren that Warsh was a “sock puppet.” However, Trump has renewed efforts to fire Fed governor Lisa Cook, a move the Supreme Court blocked in June. Trump also claimed he called Warsh before last month's meeting, telling him he “might as well” vote to raise rates because other officials had called for it. Warsh declined to comment on communications with the president at last month's news conference.

Inflation has exceeded expectations for two consecutive months, driven partly by high diesel prices. Diesel fuel reached an all-time high of $6.53 in late September and has since fallen to $6.35. High diesel costs increase shipping prices for goods including groceries and cars, potentially spreading inflation across the economy. Bhave noted that inflation has not hit the Fed's 2% target for a full calendar quarter since the end of 2020.

While the September rate hike was unanimous, some economists expect dissents from the 12 voting officials this week. Beth Hammack, president of the Federal Reserve Bank of Cleveland, and Lorie Logan, president of the Dallas Fed, are considered the most likely to vote for a hike. Both have expressed concern that current rates are not high enough to cool the economy. Some analysts suggest that dissents could actually help the Fed by showing there is still support for higher rates on the committee.