US Fed holds interest rates steady amid inflation concerns ahead of US midterms

The US Federal Reserve on Wednesday kept its benchmark interest rate unchanged at 3.75-4.00 per cent, pausing after its first rate hike since 2023 last month as policymakers weigh persistent inflationary pressures against the risks of higher borrowing costs.

The decision comes less than a week before the November 3 US midterm elections, placing the central bank’s monetary policy under renewed political scrutiny as President Donald Trump continues to push for lower interest rates.

The Federal Open Market Committee (FOMC) opted to hold rates steady despite inflation remaining well above the Fed’s long-term target of 2 per cent. US consumer inflation rose to 3.7 per cent in September, up from 3.4 per cent in August, reflecting continued price pressures across the economy.

The war with Iran, launched in late February, has sent energy prices higher, with rising costs threatening to spread to other goods and services. The administration’s tariff policies and an investment boom in artificial intelligence infrastructure and data centres have added to the inflationary challenges facing policymakers.

Why did the Fed hold interest rates?

The decision signals a wait-and-watch approach as officials assess the impact of September’s rate increase and the trajectory of inflation. Higher interest rates increase borrowing costs for households and businesses, affecting credit cards, mortgages, corporate investment and economic activity.

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The Fed must also consider conditions in the labour market, making its policy decision more complicated as it attempts to contain inflation without unnecessarily weakening economic growth.

Last month, policymakers raised the benchmark rate to a range of 3.75-4.00 per cent, marking the first increase in three years. The move drew criticism from Trump, who has argued that US interest rates should be 1 per cent or lower.

Fed independence under scrutiny ahead of midterms

The October decision comes at a politically sensitive moment, with the US midterm elections scheduled for November 3. Economic conditions, particularly the cost of living, have emerged as key campaign issues, with households continuing to grapple with elevated prices.

Trump’s repeated demands for lower interest rates have renewed questions about the Federal Reserve’s independence. The central bank’s decisions, however, are guided by its assessment of inflation, employment and broader economic conditions.

What comes next for US interest rates?

Investors will closely monitor Fed Chair Kevin Warsh’s remarks for clues about the possibility of another rate hike in December. Policymakers had indicated last month that another increase could be possible before the end of the year.

With inflation still above target and energy prices under pressure from the Iran war, the Fed faces a difficult balancing act. Its next move will depend on incoming economic data and whether price pressures show signs of easing.

For financial markets, the key question is whether Wednesday’s pause marks a temporary break in the tightening cycle or signals a more cautious approach to further rate increases.