The US Federal Reserve has held interest rates steady at 3.75% to 4%, deciding against further increases despite inflation running above its 2% target. The decision came after the central bank raised rates for the first time in three years at its September meeting. Fed Chair Kevin Warsh said the monetary policy adjustments were starting to show results, though he acknowledged that inflation remained too high. Two of the 12 committee members, Governor Lisa Cook and Cleveland Fed President Beth Hammack, voted to increase rates to 4% to 4.25%.
The Fed's announcement followed economic data showing the US economy grew at 3.4% on an annualised basis in the three months to September, stronger than analysts expected. This growth was driven by an acceleration in investment and strong consumer spending. Personal spending increased by 3.8% on an annualised basis, while private investment surged by 19.4%, largely due to investment in artificial intelligence. However, prices increased by 3.7% in the year to September, driven higher by fuel and energy prices which have surged following the war in Iran.
Warsh noted that while the economy remained resilient and moving in the right direction, the Fed wanted to gather more information before making another decision to change rates. He said tightening credit conditions and other signs suggested the economy was heading in the right direction. The Fed chair acknowledged there was uncertainty but emphasised there was plenty of economic data to come before the committee's next meeting, which should provide a clearer picture of the economy's state. Warsh declined to specify where rates might head over the next six weeks, saying 'a lot of things can happen'.
The Fed uses interest rate changes to try to keep inflation at 2% a year and maintain job market stability. Higher rates tend to mean increased borrowing costs for mortgages, credit cards and business loans, encouraging people and businesses to save more and spend less, which can slow hiring and wage growth. Conversely, rate cuts aim to boost spending and investment. Holding rates steady means rates on new mortgages and business loans are less likely to change, and interest rates on cash savings are unlikely to rise. While last month the Fed signalled there could be one more rate rise this year, Warsh would not commit to that path.
For UK savers and investors with exposure to US markets, steady rates mean American borrowing costs are unlikely to increase immediately, which could support US consumer spending and corporate profits, though persistent inflation above the Fed's target suggests further monetary tightening may eventually be needed.