The Federal Reserve left its benchmark rate unchanged on October 28, but not unanimously. Daily Drolls argues that holding was the right call on the evidence, and that the two votes against it describe a risk readers should keep in view.
What did the Fed actually decide?
According to the Federal Reserve’s statement, released at 2:00 p.m. Eastern on October 28, the Federal Open Market Committee kept the target range for the federal funds rate at 3-3/4 to 4 percent. The vote was 10 to 2. Lisa D. Cook and Beth M. Hammack dissented, and both preferred to raise the range by 1/4 percentage point.
The language was not that of a committee at ease. The statement says “Inflation remains elevated,” that economic activity “is expanding at a strong pace,” and that “Job gains have kept pace with the workforce, and the unemployment rate has changed little.” It adds that uncertainty remains elevated, in part because of geopolitical developments, while domestic spending has been resilient. The Fed’s calendar shows one meeting left this year, on December 8 and 9, and that meeting comes with a Summary of Economic Projections.
For a refresher on what was at stake, see our preview of the October meeting.
Why was holding the right call?
The case for patience rests on what is inside the inflation number. According to the Bureau of Labor Statistics, the consumer price index rose 3.7 percent over the 12 months ending in September, while the measure excluding food and energy rose 2.6 percent. Gasoline rose 9.1 percent in September alone on a seasonally adjusted basis, and 34.2 percent over the year.
Illustrative arithmetic: the gap between the headline rate and the core rate is 3.7 minus 2.6, or 1.1 percentage points. That gap is largely an energy story. Our September inflation explainer walked through why a fuel spike can lift the headline without reflecting broad price pressure across the economy.
Interest rates are a blunt tool for that kind of shock. Raising the cost of a mortgage or a business loan does not lower the price of crude oil. It slows spending on everything else. When the pressure is concentrated in one commodity, a central bank that tightens aggressively risks paying for a fuel problem with a jobs problem.
How tight is policy, really?
A worked example helps. The midpoint of the current range is 3.875 percent. Measured against headline inflation of 3.7 percent, that leaves a gap of about 0.2 percentage points. Measured against core inflation of 2.6 percent, the gap is about 1.3 percentage points.
| Inflation measure | Rate (12 months to September) | Midpoint of fed funds range minus inflation |
|---|---|---|
| Headline CPI | 3.7 percent | about 0.2 points |
| Core CPI | 2.6 percent | about 1.3 points |
This is a rough gauge, since it compares a forward-looking policy rate with backward-looking prices. But it shows why reasonable people disagree. On the headline, policy is barely restrictive. On the core, it looks moderately so. The honest answer to “is the Fed tight enough?” depends on which inflation figure the reader believes will persist.
What is the strongest case against holding?
The two dissenters made it with their votes. The Fed’s statement describes an economy expanding at a strong pace with a stable unemployment rate, and says plainly that inflation is elevated. If growth is strong and jobs are holding, the argument goes, the economy has room to absorb a higher rate, and waiting lets a price shock seep into wages, contracts and expectations.
That argument has real force. Energy shocks that look temporary can linger when businesses reset prices and households start to expect more of the same. A central bank that waits for certainty can find that certainty arrives only after the damage is done. The statement’s own wording, that the Committee “will deliver price stability,” is a commitment, and a commitment is only credible if the Committee is willing to act when the evidence turns.
Daily Drolls does not dismiss this. The disagreement is over timing, not goals. A hold now, with a December meeting that carries fresh projections, keeps the option to raise while the Committee learns whether the fuel spike spreads. The dissenters are asking whether that option should be exercised sooner.
Why does a quarter point matter at the kitchen table?
Households feel Fed decisions mostly through borrowing costs. A higher target range tends to flow into credit card rates, which are already steep. Our look at what a 22 percent APR costs shows how quickly balances grow when rates are high, and why even a small further rise matters most to those carrying debt.
Savers see the other side of the same coin: a higher rate generally means better returns on cash. That cuts both ways for a country where some households are borrowers and others are savers, and it is a reason to be cautious about describing any rate decision as simply good or bad.
What should readers watch before December?
Three things carry more weight than any single headline.
- The next inflation report. If gasoline eases, the gap between headline and core should narrow. If core drifts up, the dissenters’ case strengthens.
- The jobs trend. The statement says the unemployment rate has changed little. As we argued in reading the jobs trend rather than the monthly headline, one month of payroll data is a weak guide, and several months together tell a better story.
- The vote itself. Two dissents in the same direction are a signal. If the count grows in December, a hold will be harder to defend.
A pause that has to earn its keep
The Fed was right to wait. Energy-driven inflation is poorly suited to rate hikes, core inflation is meaningfully lower than the headline, and a committee that can see its next set of projections in six weeks loses little by looking before it acts. But the pause comes with a condition. Strong growth, a steady labor market and elevated inflation are a combination that does not stay comfortable for long, and two officials have already said as much with their votes. A hold is a decision, not a default, and it will need evidence to justify a second one.
This article is general commentary and information, not financial advice.
Sources: Federal Reserve Board; U.S. Bureau of Labor Statistics
