The US Federal Reserve chooses to wait before raising rates again, despite inflation

The Federal Reserve announced on Wednesday, October 28, that it would keep its policy rate unchanged, keeping the federal funds target range at 5.25‑5.50%. The decision comes less than a week before the United States mid‑term elections and marks the Fed’s first pause in a string of hikes that began in March this year.

The move follows a decline in headline and core inflationary pressures, with the latest consumer price data showing a modest reduction in year‑over‑year gains. Nevertheless, the inflation gauges that the Fed watches most closely – the personal consumption expenditures index and various core price measures – are still well above the 2 % goal that the central bank has set for the medium term. The policy slowdown is therefore more a signal that the policy team is monitoring the data closely than an outright reversal of its tightening stance.

In the political context, the timing of the Fed’s pause comes at a critical juncture. With the mid‑term elections drawing nearer, so‑called 'de‑Fed‑politics' is a concern for some observers. A gradual pace towards higher rates could be viewed in part as a neutral or even protective posture, allowing the market to focus on political developments without additional policy drag on growth. The Fed has historically tried to keep monetary policy out of the polling booth, but the announcement will nonetheless be closely examined by campaign strategists and economists alike.

For markets, the decision keeps the yield curve largely unchanged for the near term. Bond prices have remained firm, reflecting the absence of a further hike in the near future, while the equity markets have continued their modest rally into the week, buoyed by the reassurance that short‑term rates remain stable. The US dollar, which typically benefits from higher rates, has not regained momentum seen earlier this year, suggesting that traders are awaiting clearer evidence of Fed direction before changing position.

Moving forward, the Fed is expected to maintain its current approach – a pause followed by more selective, data‑dependent rate increases as inflation continues to evolve. The minutes from this meeting, released a week later, will likely reinforce that perspective, signalling a willingness to keep the policy rate on hold until a stronger case for tightening emerges. The central bank also signals that it will review its on policy’s forward path at the next policy meeting, allowing for recalibration if inflation trends shift.

Machine-translated from French