Fed holds rates steady despite rising inflation, with a December increase widely expected

The US central bank, the Federal Reserve, decided on Wednesday to leave its benchmark interest rate unchanged. The bank said, however, that it is not retreating from the fight against stubborn inflation.

The Fed's rate-setting committee acknowledged in a statement that inflation remains elevated. The committee renewed its pledge to deliver price stability.

According to the report, a spike in energy prices tied to the US war with Iran has made that goal more difficult to achieve.

At its previous policy meeting in September, the Fed raised rates for the first time in more than three years. Data since then has shown inflation accelerating further, with consumer prices in September up 3.7 percent from a year earlier — a bigger annual increase than the previous month.

Dan North, a senior economist at insurer Allianz Trade, said the inflation line is going up, not down — the wrong direction. He said a hike less than a week before midterm election votes are tallied would have looked suspicious, suggesting pre-election caution may also have played a role in the decision.

After this week's pause, investors widely expect the Fed to raise its benchmark rate at its next meeting in December, in an effort to tamp down demand and bring prices under control.

The decision was not unanimous. Two committee members — Fed governor Lisa Cook and Beth Hammack of the Cleveland Federal Reserve Bank — voted to raise rates by a quarter percentage point on Wednesday, while the majority opted to stand pat.

The Fed's benchmark rate is currently 3.75 to 4 percent. It helps set the cost of short-term borrowing such as credit cards.

Longer-term rates are set by the bond market but can also be influenced by Fed decisions. Mortgage rates climbed to a three-year high of 7.4 percent earlier this month before easing slightly. The high cost of home loans has weighed on the housing market, which has been in a slump for four years, according to the report.

Other parts of the economy are less sensitive. The booming investment in artificial intelligence shows no sign of slowing, North was quoted as saying — in his words, AI companies do not care what interest rate they have to pay. The frenzied push to build data centres is pushing up prices for construction materials and electronic equipment.

Consumer spending has also remained resilient, fuelled in part by upper-income shoppers benefiting from the rising stock market. Less wealthy families are in a different position — average wages rose just 3 percent in the 12 months ending in September.

Mark Zandi, chief economist at Moody's Analytics, said lower- and middle-income Americans are having a real struggle and their purchasing power is actually declining. In his view, that largely explains why people do not feel good about the economy.