The US Federal Reserve did what nearly everyone expected on Wednesday and left interest rates unchanged. The vote, though, was not unanimous, and that tells you more than the decision itself.
The Federal Open Market Committee held its benchmark rate at 3.75–4% by a vote of 10 to 2. Governor Lisa Cook and Cleveland Fed President Beth Hammack both wanted another quarter-point increase.
Two officials pushing for a hike, one meeting after the Fed raised rates for the first time since July 2023, means the debate within the Fed is about whether to keep raising rates.
The Fed’s statement was short and said little directly. It described inflation as still elevated and kept its options open. Fed Chair Kevin Warsh said politics did not influence the decision. Some observers had questioned the timing, with the vote coming just six days before the US midterm elections.
The Fed paused
The case for waiting is simple. The September increase has not yet had time to affect the economy, and job growth has slowed sharply: the US added only about 29,000 jobs in September. With signs of weakness in the labour market, most of the committee preferred to wait for more data.
The case for raising rates is also clear. Inflation is high, and its main causes are hard to address with interest rates. Energy prices have risen sharply because of the war with Iran and the near-closure of the Strait of Hormuz.
Heavy spending on AI data centres and chips is also pushing up demand and prices in parts of the economy. Higher interest rates do little about either. A central bank can slow consumer borrowing, but it cannot reopen a shipping lane.
That puts the Fed in a difficult position. Inflation is being driven by factors largely outside its control, while the tool it has could hurt a job market that is already slowing.
December hike?
The Fed did not rule out a December increase, and most investors expect one. In September, officials projected rates would end 2026 between 4.1% and 4.4%, which implies at least one more hike. Goldman Sachs said earlier this week that it expected a hold now and an increase in December, and nothing in Wednesday’s decision changed that.
The key factors will be the October and November inflation figures. If they stay high, a December hike is very likely.
What it means
For India, the main concern is not this decision but the likely path. Higher US rates keep the dollar strong and make US bonds more attractive, which draws money away from emerging markets. Foreign investors have already taken about ₹3 lakh crore out of Indian shares this year, a record. A Fed that is still raising rates gives them little reason to return.
The rupee is already under pressure. It ended Wednesday at 95.23 to the dollar, close to its record low, and the RBI has spent heavily defending it. Foreign exchange reserves have fallen by about $65 billion since early September.
The situation also limits the RBI’s options. It raised rates this month for the first time in nearly four years, partly because of inflation and partly because of the currency. If the Fed raises again in December, the RBI will find it hard to pause, even though Indian growth is slowing and higher rates are hurting smaller companies.
The good news is that the Fed did not raise rates this week. The bad news is that the risk of further increases remains, and with oil hovering near $115 a barrel, inflation pressures on India are piling up.
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