Fed holds interest rates steady – but investors bet on December rate hike

The Federal Reserve held interest rates steady Wednesday, even as inflation data has been worsening – but the central bank is largely expected to issue a quarter-point hike in December. 

It approved the hold in a 10-2 vote, with Fed Governors Lisa Cook and Beth Hammack dissenting in favor of raising interest rates by a quarter point, instead.

At a Wednesday afternoon press conference, Fed Chair Kevin Warsh declined to share any forward guidance. But investors took a tweak in the Fed’s press release as a sign that officials are trying to prepare traders for a hike at their next meeting in December, after the Fed issued one in September.

“The accumulation of more information will help the Committee determine the policy stance appropriate to ensure a timely return of inflation to the Committee’s 2 percent goal,” the committee wrote.

In his most drastic change at the central bank yet, Warsh announced that he will be reducing the number of policy votes the Fed holds each year. 

Central bankers will still meet eight times a year, but starting in 2027, one of those meetings will not include a vote on interest rates. In 2028, two of those meetings will forgo a vote on rates.

Warsh has argued that fewer votes give policymakers more time to gather data between meetings. Critics have argued that would also makes the Fed slower to react to changes in the economy. The central bank is able to call emergency votes, though these are rare. 

Though Warsh remained tight-lipped throughout the press conference, traders priced in 85% odds of a quarter-point hike at the December meeting, according to CME FedWatch. 

“Although the Fed held off on raising rates today, as we expected, they left plenty of clues that they were planning to raise rates in December,” Chris Zaccarelli, chief investment officer for Northlight Asset Management, said in a Wednesday note.

“As always, a lot can change in the data between now and then, but if it weren’t so close to the midterm elections, they probably would have raised rates today, and now it’s unlikely that anything will stop them from raising rates at the next meeting.” 

After raising rates last month for the first time since 2023, investors and economists were largely expecting the Fed to hold off this month over fears of appearing politicized less than a week away from the midterms. 

“Politics played no role in the decision,” Warsh said Wednesday. “I didn’t hear an utterance about politics. I didn’t hear a reference to politics, elections, what’s happening in the next week or so.” 

He was also asked whether anyone at the Fed will be involved in a White House hearing next week on Cook. Trump announced the hearing after the Supreme Court blocked him from firing her over allegations of mortgage fraud. Cook has repeatedly denied wrongdoing. 

“Not to my knowledge,” Warsh replied. 

The central bank chairman was repeatedly asked about concerns that the AI boom is driving inflation, as the rapid build-out of data centers has caused chip shortages and sent costs soaring.

Warsh acknowledged that AI is playing a role in the economy’s strength, but said it’s not the only factor. He also argued that the economy is not necessarily hot to the point that it’s fueling inflation.

“Is the economy running too hot? Is the economy too strong? That isn’t the judgment of most of my colleagues,” he said. 

Affordability has emerged as a defining issue of the midterms, with Democrats pulling ahead in some early polls as Americans grow frustrated with high gas and grocery prices amid the Iran war. 

Since the Fed’s last meeting, economic data has only shown more cause for concern. The Consumer Price Index rose 3.7% over the past 12 months through September, while the Producer Price Index jumped a whopping 6.3% over the same period – a sign that costs could continue to climb through the holiday season. 

Meanwhile, the Iran war has cost the US military at least $47.1 billion as of mid-October, according to a new estimate from US Central Command reported by several news outlets.

As of Wednesday afternoon, Trump had yet to react to the interest rate vote. The president has repeatedly argued that the Fed should lower interest rates and previously bashed Warsh’s predecessor, Jerome Powell, for not lowering rates fast enough. 

Economists have noted that higher interest rates often raise borrowing costs on mortgages, auto loans and credit cards.