Federal Reserve keeps rates unchanged despite elevated inflation
[October 29, 2026] By
CHRISTOPHER RUGABER
WASHINGTON (AP) — The Federal Reserve kept its key rate unchanged
Wednesday at about 3.9% despite stubbornly high inflation, as Chairman
Kevin Warsh suggested its policies are already showing signs of having
an impact.
The Fed said “inflation remains elevated” in the statement it released
after its two-day meeting, and added that holding off on a rate increase
allows “the accumulation of more information” that will inform the Fed's
next steps.
The Fed raised its benchmark rate last month by a quarter-point for the
first time in three years, defying President Donald Trump’s demands for
rate cuts, in an effort to bring inflation back to its 2% target more
quickly. The Fed is tasked by Congress to combat inflation, and it does
so by lifting rates to slow borrowing and spending and reduce price
increases.
While Warsh declined to provide much insight into what the Fed may do
next, most economists still expect the central bank to hike its key rate
another quarter-point at its next meeting Dec. 8-9. Wall Street
investors now see the odds of an increase then at nearly 85%, according
to CME Fedwatch.
“It's likely going to take one more (hike) from the Fed to get interest
rates into restrictive territory,” where they can slow inflation, said
Michael Reynolds, vice president for investment strategy at Glenmede, a
wealth advisory firm.
Politics ‘played no role’
The Fed’s decision comes just six days before a midterm election that
has focused heavily on concerns around the cost of living and
affordability. Consumers have generally soured on an economy weighed
down by more expensive gas, groceries, and clothing, among other items.
Warsh denied the election played a part in the Fed’s staying pat.
“Politics played no role in the decision," he said at a news conference
following the announcement. “I just spent two days with my colleagues
upstairs. I didn’t hear an utterance about politics.”
Instead, Warsh underscored the Fed's determination to bring inflation
back to its target.
“Energy and related prices have moved higher again in recent weeks,” he
said. “And our job is to ensure that relative price changes in some
sectors do not broaden out across the economy.”
“Don’t mistake a pause for a truce; the battle against inflation is far
from over,” Diane Swonk, chief economist at KPMG, said in a note to
clients.
Rate hikes may affect AI investment surge
Warsh faces plenty of challenges in getting inflation back to target.
Some of the forces pushing up prices — specifically the rapid buildout
of artificial intelligence infrastructure and higher energy prices — may
not be easily tamed by higher interest rates.
Still, Warsh said the “overwhelming consensus” among Fed officials is
what they’ve done “is starting to work some,” noting that credit
conditions “tightened for some businesses and households.”
He said specifically that as large tech firms rely more on borrowing to
build data centers, higher rates will have a greater ability to cool
that investment.
“Do interest rates matter?” Warsh asked. "I believe they do, and I don’t
think they’re divorced from the rest of the economy.”
Parts of the economy are being hit by higher rates, which were lifted by
market forces, even before the Fed hiked last month. The average 30-year
mortgage rate reached a three-year high of 7.4% earlier this month,
though it has since slipped a bit. Higher mortgage rates have made
buying a home unaffordable for 5 million more Americans since the
beginning of the year, according to Oxford Economics, a consulting firm.
Over time, Fed rate hikes can make mortgages, auto loans, and credit
card borrowing more expensive, adding to Americans’ sense that things
like homes and cars are getting pricier.
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Federal Reserve Board Chairman Kevin Warsh speaks during a news
conference at the Federal Reserve, Wednesday, Oct. 28, 2026, in
Washington. (AP Photo/Julia Demaree Nikhinson)
 Two dissenting votes point to
future hikes
A separate inflation measure more closely followed by the Fed, the
personal consumption expenditures price index, comes out Thursday
and is forecast to have jumped 3.6% in September from a year
earlier, up from 3.4% in August. Core prices, which exclude the food
and energy categories, are forecast to have risen 3.1%, up from 3%
the previous month. Earlier this month, the consumer price index
showed inflation picked up in September, when consumer prices rose
3.7% compared with a year earlier.
Two Fed officials dissented from Wednesday’s decision, with Fed
governor Lisa Cook and Federal Reserve Bank of Cleveland President
Beth Hammack voting in favor of hiking rates by a quarter point.
This is Cook’s first dissent since she was appointed to the board by
President Joe Biden in 2022.
Cook has been targeted by the Trump administration, which tried to
fire her last year, though the Supreme Court in June ruled she could
keep her job while litigation played out. No president has fired a
Fed governor before, a sign of the Fed’s longstanding independence
from day-to-day politics. Trump renewed his attempt to remove Cook
last month by setting up a committee to look into allegations Cook
committed mortgage fraud, which she has denied.
The dissents suggest that there is still broad support on the Fed's
rate-setting committee to lift interest rates further, economists
said.
Warsh also said that starting next year, the Fed would adjust its
regular meeting schedule. It will continue to hold eight policy
meetings a year, as it does now, but one of those meetings in 2027
will focus on longer-term strategy and not include a vote on
interest rates. Two meetings will focus on strategy in 2028, he
said.
Reynolds said the changes shouldn't make much difference to the
markets or the economy, because the Fed can always change rates if
needed between meetings, which it has done in the past.
The Fed's policy meeting is part of a busy week for central banks
around the world. The Bank of Canada met earlier, and lifted its key
rate a quarter point, to 2.5%. Policymakers at the European Central
Bank and the Bank of Japan are both scheduled to meet Thursday and
are expected to keep their key rates unchanged.
For Warsh and the Fed, another key consideration is that the U.S.
economy is growing at a healthy pace and unemployment remains low,
at 4.2%, even if hiring is also sluggish. Warsh said growth in the
July-September quarter likely rose above 3%. That would be up from
2.2% in the April-June quarter.
Many economists argue that solid growth is evidence that interest
rates aren't particularly high and the economy could withstand
higher rates to combat inflation.
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