• Fed Chair Kevin Warsh signals that inflation above the 2% objective is unacceptable, leaving the door open for further rate hikes.
  • The central bank held rates at 3.75%–4.00% on Wednesday, but two officials dissented in favor of an immediate quarter-point increase.
  • Markets now look to Thursday’s PCE inflation report for clues on whether a December move is likely.

Federal Reserve Chair Kevin Warsh made clear on Wednesday that the central bank will not tolerate inflation settling above its 2% target, even as policymakers opted to keep interest rates steady for now. The message: the battle against inflation is far from won, and further tightening remains on the table.

The Federal Open Market Committee voted 10–2 to maintain the benchmark federal funds rate at 3.75%–4.00%, following a quarter-point increase in September—the first hike in over three years. The dissent came from Governor Lisa Cook and Cleveland Fed President Beth Hammack, who both favored another immediate quarter-point increase. The split underscored a committee that is united on the need to combat inflation but divided on how fast to move.

In its statement, the Fed described economic growth as “strong,” an upgrade from “solid” in September, while acknowledging that inflation “remains elevated.” Officials reiterated their commitment to a “timely return” to the 2% objective, which is measured by the personal consumption expenditures (PCE) price index. September’s PCE report is due Thursday and is expected to show inflation running well above target, with the consumer price index up 3.7% year-over-year and producer prices up 6.3%.

Warsh, who succeeded Jerome Powell in May, has consistently framed 2% as a hard ceiling rather than a long-term average. His remarks on Wednesday reinforced that stance, signaling that the current pause is not a victory declaration. “The Fed will not accept inflation settling above its 2% objective,” Warsh said during his press conference, according to prepared remarks. The comments align with the committee’s promise of a “timely return” to target and suggest that the threshold for further hikes may be lower than some investors had hoped.

The decision comes just days before the U.S. midterm elections on November 3, with inflation and living costs dominating the political agenda. While the Fed’s independence is designed to shield it from political pressure, the timing has drawn scrutiny. JPMorgan (JPM) chief U.S. economist Michael Feroli argued that Warsh needed to explain why the Fed raised rates in September but paused in October despite signs of stronger underlying inflation, warning that an inadequately explained pause could fuel perceptions of political influence.

Energy prices have been a key driver of the inflation resurgence. The ongoing war with Iran has pushed oil and gasoline prices higher, feeding through to broader costs. Diesel, a critical input for shipping and agriculture, has seen sharp increases, raising concerns that inflation is spreading beyond energy. Higher interest rates can temper demand but do little to address supply-side disruptions, complicating the Fed’s task.

Market expectations for a December rate increase have been building. Futures markets currently price in a roughly 60% chance of a quarter-point hike at the December meeting, according to CME Group (CME) data. However, the Fed did not explicitly commit to such a move, leaving the door open for further data-dependent adjustments. Goldman Sachs (GS) economist David Mericle suggested the committee may prefer an every-other-meeting hiking cadence, but that view is not universally shared.

The next major test for policymakers will be Thursday’s PCE release, followed by November employment and inflation data before the December 13-14 meeting. A hotter-than-expected PCE reading could solidify the case for another hike, while signs of cooling might give the Fed room to hold steady. For now, Warsh’s message is clear: the Fed’s tolerance for above-target inflation is wearing thin.

Correction: An earlier version of this article misstated the date of the September rate increase. It occurred at the September FOMC meeting.