WATCH: Warsh holds briefing after Fed leaves key interest rate unchanged

The Federal Reserve decided not to change its benchmark interest rate at its Wednesday policy meeting. The rate remains about 3.9%. This matters because the Fed uses the rate to influence borrowing, spending, economic activity, and inflation. The decision followed a two-day meeting and offered little guidance about what comes next.

The Fed said inflation remains elevated. It also said holding rates steady would allow officials to collect more information before deciding how to return inflation to the 2% target. The central bank raised the rate by a quarter point last month, its first increase in three years.

The next move is uncertain. Officials had previously indicated another increase could come this year, and Wall Street investors have priced in a December hike. Two officials, Lisa Cook and Beth Hammack, dissented because they preferred a quarter-point increase.

The Federal Reserve’s key interest rate is the central bank’s benchmark rate for steering financial conditions. It does not directly set every mortgage, auto-loan, or credit-card rate. Instead, changes in the benchmark influence other interest rates and the cost of borrowing throughout the economy. The goal is to balance price stability with economic activity.

When the Fed raises the rate, banks and lenders generally face higher funding costs. Those costs can pass through to households and businesses. People may delay buying homes, cars, or other goods. Companies may also postpone investments because financing becomes more expensive. Lower borrowing and spending can reduce pressure on prices.

The article says the Fed raises rates to slow borrowing and spending and cool price increases. It kept the rate near 3.9% while inflation remained elevated. That choice shows the trade-off: rates can help reduce inflation, but they can also make major purchases and credit more expensive.

Inflation is still well above the Federal Reserve’s goal. Consumer prices rose 3.7% in September compared with a year earlier. That is 1.7 percentage points higher than the Fed’s 2% target. The September increase was also much larger than February’s 2.4% rate, before the Iran war mentioned in the article.

Prices rose 0.3% from August to September. They had risen by the same 0.3% amount from July to August. If prices continued climbing at that monthly pace for a full year, inflation would run considerably faster than the Fed’s target. The article identifies the consumer price index as the most widely followed inflation measure.

Another measure, the personal consumption expenditures price index, was expected to show a 3.6% annual increase in September, up from 3.4% in August. These figures help explain why officials remain concerned and why another rate increase remains possible.

When the Fed raises its benchmark rate, borrowing generally becomes more expensive across the economy. Lenders face higher financing costs and often pass them to households through higher interest rates. The result can affect mortgages, auto loans, credit cards, and business borrowing. Payments rise, or people borrow less.

The article gives a clear housing example. The average 30-year mortgage rate reached a three-year high of 7.4% earlier in October. Oxford Economics estimated that higher mortgage rates had made buying a home unaffordable for 5 million more Americans since the start of the year. Similar pressure can affect car purchases and credit-card balances.

The broader mechanism is weaker demand. More expensive loans encourage people and businesses to delay purchases or investments. That slows borrowing and spending, which can cool price increases. But it also worsens affordability and adds to consumers’ concerns about already-costly homes, cars, gas, groceries, and clothing.

A pause gives the Federal Reserve time to observe new economic evidence before raising rates again. The Fed’s statement specifically said holding steady would allow “the accumulation of more information.” This matters because officials are trying to return inflation to 2% without unnecessarily worsening conditions for borrowers, consumers, and businesses.

The central bank raised its benchmark rate by a quarter point last month, its first increase in three years. Other borrowing costs had already risen through market forces. Mortgage rates, for example, reached 7.4% earlier in October. Keeping the key rate unchanged lets officials assess how those higher costs are affecting demand and prices.

The pause does not signal that inflation is solved. The Fed said inflation remains elevated, and officials had previously penciled in another hike this year. Investors also expected a possible December increase. Wednesday’s statement, however, gave little indication whether that increase remains likely.

Some inflation comes from forces that interest-rate policy cannot easily control. The article specifically points to higher energy prices and the rapid buildout of artificial-intelligence infrastructure. These pressures can raise costs or increase demand independently of whether loans become more expensive. That makes inflation harder for the Fed to manage.

For example, energy prices can increase costs across transportation, production, and household budgets. Investment in artificial-intelligence infrastructure can create strong demand for equipment, construction, energy, and related resources. Raising interest rates may slow some borrowing, but it cannot directly determine global energy prices or eliminate the need to build infrastructure.

This limits how quickly rate hikes can bring inflation down. The Fed can still try to cool broader spending and demand, but some price pressures may persist. That challenge helps explain why Chairman Kevin Warsh faces uncertainty over whether to raise rates again, even as September inflation reached 3.7%.

Inflation is a sustained increase in the prices of goods and services, which reduces what money can buy. It is measured with price indexes that track a basket of household spending. The article names the consumer price index, or CPI, as the most widely followed measure. It also identifies the personal consumption expenditures price index, or PCE, as a measure watched more closely by the Fed.

The article reports that consumer prices rose 3.7% over the year in September, while the Fed’s target is 2%. A low, stable rate helps households and businesses plan because prices do not change unpredictably. It also avoids the damaging effects of rapidly rising prices. These explanations about why the target is 2%, rather than zero, use established economic knowledge beyond the article.

A zero target can leave an economy vulnerable to falling prices, or deflation, which may discourage spending and increase the real burden of debts. A small positive target also gives central banks more room to lower rates during a downturn.