The Federal Reserve held short-term interest rates steady last week. If it does so again at its next meeting in December, it’ll need a better explanation.
Recent inflation figures have been surprisingly bad, and new data released after last week’s meeting underlined the message. The Fed’s preferred measure, the personal consumption expenditures price index, rose by 0.5% in September, the fastest since March. Excluding food and energy, the increase was 0.3%, for a year-over-year rise of 3.1%, higher than August and still well above the central bank’s 2% target.
Meanwhile, growth has picked up. In the third quarter, output grew by a solid 3.4% at an annual rate. The Fed’s new policy statement called the pace of expansion “strong” and domestic demand “resilient.” The labor market, despite fears that AI will destroy more jobs than it creates, is still at full employment.
All of which implies that the federal funds rate, at 3.75% to 4%, is still too low. Granted, hiking again just before midterm elections would’ve been awkward. And even now, some of the latest inflation overshoot is likely to be temporary. Tariffs and higher energy costs due to the war in Iran have pushed up prices; with time, assuming there’s no more bad news and expected inflation stays anchored, some of the excess should fade.
Yet if the Fed is tightly focused on price stability, as Chair Kevin Warsh insists, it shouldn’t be happy with where things stand. Inflation has run significantly above target for more than five years. At some point, expectations will shift.