Fed Leaves Rates Unchanged as Inflation Keeps Climbing

The Federal Reserve chose not to raise interest rates on Wednesday, while signaling that it has not backed away from its fight against persistent inflation. The central bank restated its commitment to price stability, a goal complicated by a jump in energy prices linked to the U.S. war with Iran.

"Inflation remains elevated," the Fed's rate-setting committee said in its statement.

The pause follows the Fed's September meeting, when it raised rates for the first time in more than three years. Since then, new data has shown inflation speeding up. Consumer prices in September were 3.7% higher than a year earlier, a larger annual gain than the month before. "It's 'wrong way,'" said Dan North, a senior economist at Allianz Trade. "That inflation line is going up, not down."

The decision arrived less than a week before midterm election votes are counted, which may have encouraged caution at the central bank. "It would be suspicious if there were a hike before the midterm," North said.

Policymakers are widely expected to raise the benchmark rate at their next meeting in December, as they try to cool demand and bring prices under control. Two members of the committee wanted to act sooner. Fed governor Lisa Cook and Beth Hammack of the Cleveland Federal Reserve Bank voted for a quarter-point increase, but a majority preferred to hold.

The benchmark rate currently stands at 3.75% to 4%. It helps set borrowing costs for short-term credit such as credit cards. Longer-term rates are determined by the bond market, though Fed decisions can influence them. Mortgage rates hit a three-year high of 7.4% earlier this month before easing slightly, and expensive home loans have weighed on a housing market that has been in a slump for four years.

Some parts of the economy are less affected by higher rates. Investment in artificial intelligence continues to boom regardless of the Fed's efforts to slow things down. "The A.I. companies don't care what interest rate they have to pay," North said. The rush to build A.I. data centers is also raising prices for construction materials and electronic equipment.

Consumer spending has held up as well, supported partly by higher-income shoppers who gain from the rising stock market. Less wealthy households are in a different position, as average wages rose just 3% in the 12 months ending in September, trailing the rising cost of living.

"Lower and middle-income Americans are having a real struggle," said Mark Zandi, chief economist at Moody's Analytics. "Their purchasing power is actually declining. And that's a pretty uncomfortable place to be." He added that this likely goes a long way toward explaining why people don't feel good about the economy.