The US Federal Reserve decided to keep interest rates at the previous level on Wednesday. This occurred even after Chairman Kevin Warsh stated that inflation remains 'too high,' but he emphasized that political factors did not influence the central bank's decision not to continue raising rates shortly before crucial midterm elections.
At the time of the announcement, the local currency rand remained stable at R16.65 against the US dollar, while the US dollar showed a slight weakening amid decreased risk appetite and rising American stocks. In South Africa, many economists expect the local MPC to keep the repo rate unchanged at its November meeting, even if inflation is projected to peak around 5% by the end of the year.
At the Federal Open Market Committee (FOMC) meeting, which consisted of 12 members, the decision to keep rates in the target range between 3.75 and 4.00 percent was made by a vote of 10 to 2. The reason for this was the demand for more data to combat inflation, following the Fed's first rate hike in three years at the previous September meeting.
Two committee members, Governor Lisa Cook and Fed President Cleveland Beth Hammack, expressed disagreement, calling for an immediate quarter-point rate hike. Warsh told reporters that 'energy prices and related commodities have risen again in recent weeks, and our task is to ensure that relative price changes in some sectors do not spread to the entire economy.'
Nevertheless, he noted that the FOMC needs additional information in the coming weeks to 'determine the appropriate policy stance to ensure the timely return of inflation to the target of two percent.' The committee is scheduled to meet next in early December.
For over five years, the central bank has failed to reach its inflation target, resulting in households and businesses suffering from constant price increases. Donald Trump's war against Iran, initiated in late February, led to a sharp spike in energy prices and fueled domestic inflation, alongside his broad tariff policies.
Price increases are also driven by the boom in artificial intelligence (AI) technology investments and the construction of massive data centers to support them. This decision was made six days before the November 3rd midterm elections, where the Democratic Party aims to take control of both houses of Congress from Trump's Republicans.
Trump's approach to the economy became a key issue throughout the campaign, as working families across the country struggle to cover expenses despite generally stable economic growth. US consumer price inflation in September was higher than expected, reaching 3.7 percent, approaching the three-year high set in May.
Warsh stated that 'policy played no role in this decision,' emphasizing his support for the Fed's independence despite repeated attacks on the institution by Trump since taking office. Speaking to CNBC after the Fed meeting, US Treasury Secretary Scott Bessent expressed 'great confidence' in Warsh and Trump.
Bessent added: 'I have great confidence in Chairman Warsh to guide the Fed between the right combination of growth and inflation, because what cannot be done is cause enough slowdown in growth so that energy consumption falls.'
On Wednesday, the Fed reported that economic activity in the United States is expanding at 'strong' pace, raising its tone compared to the FOMC meeting held six weeks earlier. At the press conference, Warsh addressed this topic and questioned whether the AI investment boom is fueling inflation.
He asked: 'Is the economy running too hot? Is the economy running too strongly? This is not the opinion of most of my colleagues.' In a significant move, Warsh also announced a reduction in the frequency of interest rate adjustments over the next two years. In 2027 and 2028, the Fed will continue to hold eight meetings per year, but next year it will set rates seven times, and the year after that—six times.
Warsh explained: 'Defining the correct policy includes assessing short-term events in timely, regular, and information-rich intervals. But it is equally important that we, as a intellectually diverse group, leave time and space for strategic reflection, for contemplating new relatively large issues, for looking at longer horizons.'
Wendy Edelberg, a senior fellow at the Brookings Institution, told AFP before the meeting that the decision to maintain rates after the September hike is potentially contradictory, given that the labor market—another mandate of the Fed—remains largely stable. She noted: 'From an economic perspective, I don't quite understand the logic. If there was a reason to raise interest rates at the last meeting, I think there is an equally convincing economic reason to raise interest rates at this meeting.'
The Fed has a dual mandate: to maintain maximum employment while keeping inflation at the long-term target. It achieves this primarily through one tool: the key interest rate of the economy. Raising rates typically cools inflation but can also slow economic activity; lowering rates can stimulate economic activity but can also fuel inflation.
The unemployment rate in the US has remained largely stable at around 4.2 percent over the past year, with job growth being mostly positive—although driven by several sectors. Other developed economies are also facing high inflation; on Wednesday, the Bank of Canada raised its key interest rate to 2.5 percent, marking its first increase since July 2023.
