Fed Holds Rates at 3.75%-4% Despite 3.7% Inflation

The Federal Reserve kept its benchmark rate between 3.75% and 4% on Wednesday, six days before the midterm elections, even as inflation climbs back toward the three-year high it reached in May.

The Federal Open Market Committee voted 10-2 to hold steady. Fed Governor Lisa Cook and Cleveland Fed President Beth Hammack dissented. In its statement, the Fed said the two "preferred to raise the target range for the federal funds rate by 1/4 percentage point at this meeting."

Why did Cook's dissent surprise markets?

Hammack's vote against the hold was expected. Cook's was not. Previews of the meeting had named Hammack, Dallas Fed President Lorie Logan, and Minneapolis Fed President Neel Kashkari as the likeliest dissenters. Cook, a Fed governor, had not featured in that lineup.

The split vote matters because it shows the committee's center is softening on one side. Two of twelve voters wanted another hike. That is the same tension that produced September's move.

September's hike was the first increase since 2023. It was also Fed Chair Kevin Warsh's first since President Donald Trump gave him the position.

What changed in the statement?

The Fed added a new line on how it will decide what comes next. The statement now reads: "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."

That sentence replaced September's line, which said that month's hike would "support a timelier return to the Committee's 2 percent goal." The shift in wording signals a wait-and-see stance. The Fed wants more data before its next move.

The statement closed with the same line as last month: "The Committee will deliver price stability."

On growth, the language brightened. The Fed said "economic activity is expanding at a strong pace." In September, it had called the pace "solid."

How hot is inflation running?

Prices have kept climbing since the September hike. Consumer prices rose 3.7% in September from a year earlier, pushed up by gasoline. Core inflation, which strips out food and energy, rose 2.6% and beat forecasts.

That leaves headline inflation edging back toward the three-year high of May. The Fed's target is 2%. The gap between the two numbers is roughly 1.7 percentage points.

The stronger growth read cuts both ways. It supports the case that the economy can absorb higher rates. It also gives hawks like Cook and Hammack room to argue that demand is running too hot to leave policy unchanged.

What is Warsh signaling?

Very little, by design. Warsh has made a point of not signaling the Fed's next move.

"I don't prejudge meetings," he said this month.

That refusal to guide markets marks a break from the forward-guidance-heavy style of his predecessors. Investors will have to read the data themselves, starting with the next inflation prints.

What comes next?

The new statement language points to data dependence. Each new consumer price report and jobs figure now carries more weight in setting the rate path. A hold six days before the midterms avoids a political flashpoint, but the 10-2 vote and the 3.7% inflation rate suggest the committee's next meeting will hinge on whether price growth cools or whether Cook and Hammack's argument gains converts.