5 million households priced out as Fed holds 3.9% before midterms

Federal Reserve officials will keep the benchmark interest rate at 3.9% on Wednesday, ending a meeting that many economists predicted would be a hold. The decision comes six days before midterm elections and follows a month of hotter than expected inflation data. Futures markets currently assign almost no probability to a rate increase at this session.

Chairman Kevin Warsh will conclude his fourth meeting in the role. His tenure has been defined by scrutiny over his independence from President Donald Trump, who appointed him earlier this year. The timing of the announcement places the central bank's decision in direct contrast to the political calendar.

Consumer borrowing costs have risen sharply this year. The average 30-year mortgage rate hit a three-year high of 7.4% in early October before dropping to 7.32% last week. A year ago, that same rate stood just under 6.2%. Oxford Economics estimates that these increases have pushed home buying out of reach for an additional 5 million households.

Inflation remains above the central bank's 2% annual target. Diesel fuel prices reached a record high of $6.53 in late September and have since fallen only to $6.35. Higher diesel costs increase shipping expenses for goods ranging from groceries to automobiles, potentially spreading price pressure across the economy.

Philip Jefferson, vice chair of the Federal Reserve board, suggested that the committee needs more time to assess its next steps. He noted that long-term interest rates have already risen in financial markets. Jefferson stated that he and his colleagues will need to reach their own conclusions, a process that may take additional time.

Joseph LaVorgna, chief economist at SMBC Americas, argued that the Fed will avoid a hike to prevent political friction. He said the central bank does not want to antagonize the White House so close to the election date. This view contrasts with the earlier expectation that the Fed would raise rates by a quarter-point to 4.1% to combat inflation.

Warsh has historically opposed what he calls forward guidance, which involves providing clear signals about future policy moves. However, recent speeches by other top officials have sounded similar to such guidance. Aditya Bhave, head of U.S. economics research at Bank of America, noted that this creates a credibility issue for Warsh's stated policy preferences.

The September rate decision was unanimous, but analysts expect dissents this week. Beth Hammack, president of the Federal Reserve Bank of Cleveland, and Lorie Logan, president of the Dallas Fed, are viewed as the most likely candidates to vote for a higher rate. Their potential dissent would signal that a portion of the committee still believes current rates are too low to cool the economy.

President Trump has renewed his push to remove Fed governor Lisa Cook from her position. The Supreme Court blocked a previous removal attempt in June. Trump also revealed that he called Warsh before the September meeting to suggest the chairman vote for a rate hike. Warsh has declined to comment publicly on the frequency of their communications, leaving questions about the degree of his independence open.

If Warsh repeats his previous language that inflation is too high and must return to 2% in a timelier fashion, markets will interpret that as a signal for a December rate hike. The upcoming statement will serve as the primary gauge for how the committee views the current trajectory of prices and wages.