• The Federal Reserve held its benchmark rate at 3.75%–4.00% on October 28, but two dissents favoring a quarter-point increase underscore lingering inflation concerns.
  • Governor Kevin Warsh emphasized the Fed's readiness to act, preserving the option for further tightening despite the pause.
  • Markets are pricing an 85% probability of a December hike, per CME (CME) FedWatch data, as investors await key inflation reports.

A Hawkish Hold

The Federal Reserve left its benchmark interest rate unchanged at 3.75%–4.00% on October 28, but the decision was far from a dovish signal. Two policymakers—Governor Lisa Cook and Cleveland Fed President Beth Hammack—dissented in favor of a quarter-percentage-point increase, highlighting persistent worries about elevated inflation. The split vote suggests that the committee remains vigilant even as it pauses to assess economic conditions.

Governor Kevin Warsh, a key voice on the board, reinforced that stance in remarks following the decision. "We have made clear our readiness to act," Warsh said, adding that the Fed has "shown our willingness to act"—a nod to September's quarter-point hike, the first in three years. His comments were interpreted as a signal that further tightening remains possible, though not imminent. The phrasing stops short of committing to a specific timeline, leaving the door open for a December move if inflation data warrant it.

Inflation Still Stubborn

The Fed's statement noted that inflation "remains elevated" and that additional information would help determine the appropriate policy path. The central bank's preferred inflation gauge—the personal consumption expenditures (PCE) price index—was due Thursday morning, and economists expect it to show continued price pressures. September's consumer-price inflation rose to 3.7% year over year, driven by higher energy costs, while producer prices jumped 6.3%, according to recent reports. The conflicting signals have complicated the Fed's task of balancing price stability with economic growth.

Market participants are leaning toward another hike. As of Wednesday, futures markets priced an 85% probability of a quarter-point increase at the December meeting, according to CME FedWatch data cited by CNBC (VSNT). That expectation aligns with forecasts from several analysts. KPMG expects a December move, describing October's pause as buying time rather than resolving inflation. Deutsche Bank (DB)'s Brett Ryan also anticipates further tightening, while Goldman Sachs (GS)' David Mericle suggested officials are comfortable with an every-other-meeting pace of increases—though he cautioned that this is an interpretation, not an official rule.

Political and Global Crosscurrents

The decision lands less than a week before U.S. midterm elections, where affordability and living costs are front and center for voters. President Donald Trump has repeatedly called for lower rates, but Warsh has stressed the importance of central-bank independence. "We are focused on our mandate," Warsh said, according to people familiar with the matter, pushing back against political pressure. JPMorgan (JPM)'s chief U.S. economist, Michael Feroli, argued that Warsh needs to clearly explain why the Fed paused despite potentially stronger inflation data. "An insufficient explanation so close to the election could invite suspicions" of political influence, Feroli warned—a concern, not an accusation.

Globally, the inflation fight is far from over. The ongoing Iran war has pushed oil and gasoline prices higher, complicating the outlook. Expectations for future rate hikes have also risen for the Bank of England and the Bank of Japan, with smaller upward shifts for the Fed and European Central Bank, according to related reporting. The Fed's challenge is part of a broader reassessment of inflation persistence, though policy paths differ by country.

What's Next

Attention now turns to Thursday's PCE release, followed by employment and inflation data ahead of the December 13-14 meeting. For households and businesses, borrowing costs remain high, particularly for mortgages and other interest-sensitive loans. The Fed's willingness to act—even without a hike today—should keep upward pressure on rates until inflation shows a clear and sustained decline. Warsh's message was carefully calibrated: no promise of immediate action, but a clear signal that the fight against inflation is not over.

Clarification: An earlier version of this article misstated the timing of the September rate hike. It was the first increase in three years, not the first since 2018.