Three takeaways
- The Fed held rates at 3.75% to 4%, and it will vote on rates less often: seven times in 2027 and six a year starting in 2028.
- The economy grew at a 3.4% annual pace in Q3, and companies buying equipment for the AI build-out drove about a third of that growth.
- Inflation hit 3.6% in September. If next week's jobs report comes in strong, a December rate hike is back on the table.
The Fed's major announcement
The Fed met and kept rates steady at 3.75% to 4%. After raising rates in September, they decided to pause to evaluate the incoming economic data, and wait on more inflation numbers. Two members, Lisa Cook and Beth Hammack, voted for a hike anyway. The Fed met on Wednesday and more data came out on Thursday. If the dates had been reversed, I think more of the committee might have wanted to hike. More on that below.
But that wasn't the most important part of the meeting. Fed Chair Kevin Warsh announced that the Federal Open Market Committee (FOMC) will cut its rate-setting meetings from eight to seven in 2027, then to six a year starting in 2028. The committee will still meet eight times a year, but the extra meetings become strategy sessions with no rate vote. The Fed has set rates eight times a year since 1981.
Fewer meetings means fewer scheduled chances to change course. Each decision carries more weight, and more data piles up between them. When the Fed reads the data right, that's fine but when it reads it wrong, the next scheduled fix is two months away instead of six weeks.
GDP: the AI build-out is showing up in the numbers
The other big release this week was GDP and PCE. They came out Thursday, the day after the Fed met, and the numbers are hot, hotter than expected.
Real GDP grew at an annualized 3.4% in Q3. Household spending grew at an annualized 3.8% for the second straight quarter. Business investment climbed 12.7%, the fastest pace since 2020, driven by the AI infrastructure build-out: data centers and the equipment that goes in them. Business spending on equipment alone jumped roughly 20.9%, adding over 1.1 percentage points to GDP growth.
So about a third of all the growth this quarter came from companies buying equipment. Investment shows up twice in an economy. First as demand: someone pours the concrete, someone gets paid, and that paycheck gets spent. Later, if the bet pays off, as supply: more capacity to produce. Right now we're living in the demand half, which pushes on prices before any productivity payoff arrives.
Inflation: still too hot
The personal consumption expenditures price index rose a seasonally adjusted 0.5% in September, putting annual inflation at 3.6%. Core PCE, which strips out food and energy, rose 0.3% for the month and 3.1% over the year. Averaged over the whole quarter, prices looked calmer. September is where it heated back up. Inflation numbers are high and persistent.
What happens next?
So growth is high and inflation is high. Let's see what happens next week with the jobs report. If it comes in strong, the Fed has more room to raise rates to bring inflation down, and I think a December hike goes back on the table.
What it means for you
Affordability remains a concern in this economy. Business investment gave GDP its extra boost this quarter, but consumer spending is still doing most of the lifting. And households are stretching to do it. In September, after-tax income adjusted for inflation fell 0.3%, and inflation-adjusted spending was flat. People paid more to buy the same amount of stuff, and the saving rate sits at 3.8%.
So if your raise this year was 3%, the things you buy went up 3.6%, and you're a little behind. If you carry a credit card balance or are shopping for a car loan, don't plan around rates coming down soon. With another hike possible in December, paying down variable-rate debt now is the safer move.
For the classroom and your conversations
- A company spends billions building a data center. Who gets paid this year, and when, if ever, does the rest of the economy see the payoff?
- Starting in 2028, the Fed will vote on rates six times a year instead of eight. What does it gain from fewer decisions, and what does it risk?
- If your pay went up 3% and prices went up 3.6%, did you get a raise? How would you explain the answer to someone at the dinner table?
Read and listen more
Would you rather the Fed meet more often and move in small steps, or meet less and make bigger calls?