Why the Federal Reserve has kept interest rates unchanged despite sticky inflation

The US Federal Reserve left interest rates unchanged on Wednesday, October 28, holding its benchmark rate at 3.75%-4.0% even as inflation remains above its target. The central bank last raised rates by 25 basis points at its September meeting.

Inflation is still high, but the Fed wants more data

 

In its post-meeting statement, the Federal Open Market Committee (FOMC) said "inflation remains elevated" and noted that policymakers would rely on additional economic data to determine the appropriate policy path.

While price pressures have proven more persistent than expected, several Fed officials have recently argued that current interest rates are already restrictive. The central bank therefore sees room to evaluate future inflation, employment and growth trends before deciding whether another rate increase is needed.

The committee was not unanimous. Governor Lisa Cook and Cleveland Fed President Beth Hammack voted in favour of a 25-basis-point rate hike, highlighting concerns that inflation could remain elevated for longer.

Strong economy gives the Fed room to wait

 

The Fed's decision was also supported by continued strength in the US economy. In its statement, the central bank upgraded its assessment of economic activity, describing it as "expanding at a strong pace."

Consumer spending remains resilient, unemployment is low and business investment, particularly in artificial intelligence-related sectors, continues to support growth. At the same time, inflation is still running above the Fed's 2% target, creating a delicate balancing act for policymakers.

Investors will now watch upcoming inflation and jobs data closely ahead of the Fed's December meeting, which could prove pivotal for the interest-rate outlook.

How the US markets reacted?

US stocks were mixed on Wednesday as investors assessed the Federal Reserve's 10-2 decision to keep interest rates unchanged. The Dow Jones Industrial Average and the S&P 500 rose about 0.1%, while the Nasdaq Composite slipped into negative territory.

Technology stocks have regained momentum this week, helping the S&P 500 and Nasdaq post gains for a second straight session. Investors are now turning their attention to earnings from Microsoft and Alphabet, due after the closing bell, for fresh signals on artificial intelligence demand and corporate spending plans.