Fed Keeps Rates at 3.75% to 4% as Oil-Driven Inflation Tests Policymakers

The Federal Reserve left its benchmark interest rate unchanged this week, keeping borrowing costs elevated after a quarter-point increase in September. The Federal Open Market Committee held the federal funds rate at a target range of 3.75% to 4%, even as inflation runs well above the central bank's goal.

Two officials wanted to raise rates again. The decision leaves the door open to further increases, according to Conduit Street Blog, which reported that policymakers are waiting for more economic data.

The central numbers behind the decision

• 3.75% to 4%: The target range for the federal funds rate, which the committee chose to maintain, according to the Fed's announcement as reported by Hardware Retailing.
• 10-2: The vote. Governor Lisa Cook and Cleveland Fed President Beth Hammack preferred a quarter-point increase, according to Conduit Street Blog, Fortune and Hardware Retailing.
• 2%: The Fed's inflation target. The committee's statement said inflation remains elevated.
• 3.4%: The yearly rise in August in the personal consumption expenditures price index, the Fed's preferred gauge, according to Conduit Street Blog.
• 3.7%: The September inflation reading over 12 months, following 3.4% increases in both July and August, according to Fortune. Fortune did not name the specific measure.
• 34.2%: The year-over-year increase in gasoline prices in the Bureau of Labor Statistics' September report, as cited by Fortune.

What is behind the pause

In its statement, the Fed said economic activity is expanding at a strong pace. It pointed to resilient domestic spending, strong productivity growth and robust capital investment. Job gains have kept pace with the workforce, and the unemployment rate has changed little. The Fed also said uncertainty remains elevated, partly because of geopolitical developments. It said more information will help determine the right policy stance, and added: “The Committee will deliver price stability.”

Fortune argued that much of the inflation pressure comes from oil. It tied the price rise to the conflict between the U.S. and Iran, which has shown no sign of ending. Fortune reported that oil from Kuwait, Qatar, Saudi Arabia and the United Arab Emirates must pass through the Strait of Hormuz, some 20 million barrels a day by 2024 figures. It said Russia's war with Ukraine has also constrained supply, and that oil has traded above $100 a barrel since Oct. 7.

Fed Chairman Kevin Warsh acknowledged the oil increase at his post-meeting press conference, according to Fortune. He said oil prices and market-set interest rates had moved together for much of the year. Recently, he said, oil has kept rising while market rates have fallen. He said that if oil prices were to drop, the Fed would need to examine the effect on its dual mandate and on financial markets.

Fortune also reported that Treasury Secretary Scott Bessent and other economists have urged the Fed to look past price pressure from supply shocks. According to Fortune, the market consensus is that rate hikes will come at every other meeting rather than at each one. Fortune read the hold as a sign that the Fed will not let the oil shock dictate its path.

What this means for borrowers and local budgets

With the target range unchanged, borrowing costs across the economy stay elevated rather than rising further for now. Conduit Street Blog, which writes for county governments in Maryland, said higher rates can raise financing costs for school construction, roads, public safety facilities, and water and sewer projects. It said elevated rates can also slow housing activity and private development, which can affect local economies and revenues.

For households and businesses, the practical effect is that the cost of credit is not expected to ease soon. The Fed has said it is weighing incoming data, and two of its voting members already favor a higher rate.

What happens next

The next Federal Open Market Committee meeting is scheduled for Dec. 8-9. Conduit Street Blog reported that policymakers have said additional action remains possible if inflation stays elevated. Fortune noted that the Fed must balance its credibility on inflation against using interest rates to counter a single factor, oil, however significant.

Around Prague, based on reporting by Conduit Street Blog, Fortune, Hardware Retailing