Fed Set to Hold Rates Steady a Week Before Midterms

By Daniel Okafor

The Federal Reserve is expected to leave its key interest rate unchanged on Wednesday, less than a week before midterm elections that have turned on the cost of living. The decision comes despite inflation that has accelerated over the past two months as the Iran war drove spikes in oil and gas prices.

The stakes are political as much as monetary. Voters have soured on an economy where gas, groceries, and clothing keep getting more expensive. Consumers have struggled with high prices through September, and household budget concerns could shape how Americans vote.

What did the Fed do last month?

The Fed, led by Chairman Kevin Warsh, raised its key rate in September for the first time in three years, from about 3.6% to 3.9%. Investors and economists read the move as a first step toward a renewed effort to bring inflation back to the Fed's 2% target. Higher borrowing costs, over time, cool spending and slow price growth.

President Donald Trump slammed the Fed for that hike. He mostly blamed the central bank's rate-setting committee rather than Warsh, whom he appointed.

Why is holding rates a hard call?

Some of the forces driving inflation will not bend to higher rates. The rapid buildout of artificial intelligence infrastructure is pushing up prices for goods like laptops, and higher energy prices add pressure from outside the Fed's reach.

Other parts of the economy are already feeling the squeeze. The average 30-year mortgage rate hit a three-year high of 7.4% earlier this month before slipping slightly. Higher mortgage rates have made buying a home unaffordable for 5 million more Americans since the beginning of the year, according to Oxford Economics, a consulting firm. Over time, Fed hikes can make mortgages, auto loans, and credit card borrowing more expensive.

How fast is inflation actually moving?

Consumer prices rose 3.7% in September compared with a year earlier. That is far above the 2.4% rate recorded in February, just before the Iran war. On a monthly basis, the consumer price index rose 0.3% in both August and September. At that pace sustained over a full year, inflation would run well above the Fed's 2% target.

On Thursday, the personal consumption expenditures price index — the inflation gauge the Fed follows most closely — is forecast to have jumped 3.6% in September from a year earlier, up from 3.4% in August. Core prices, which exclude food and energy, are forecast to have risen 3.1%, up from 3% the previous month.

Aditya Bhave, head of U.S. economics at Bank of America, said economists and the Fed have grown too complacent about above-target inflation. Higher oil and gas prices will likely keep inflation elevated for several more months, he said, and rising diesel costs will push up shipping prices for nearly every type of good, spreading inflation more broadly.

"Unless the Fed takes this problem more seriously and stops essentially making excuses about inflation, I think we're not going to get back to 2% until the next recession," Bhave said.

What should viewers watch at the press conference?

Warsh will speak after the decision, and his remarks will be parsed for hints about the next meeting in December, where Wall Street already widely expects a hike. He will likely repeat the Fed's desire for a "timelier" return of inflation to the 2% target. If the Fed holds on Wednesday, Warsh will face a direct question: why hike in September but not now?

Expect a short session. Warsh's press conference ran about 30 minutes last month; his predecessor, Jerome Powell, often held them for about 45 minutes.

What about the wider economy?

The Fed's meeting anchors a busy week for central banks. The Bank of Canada meets Wednesday and is forecast to lift its key rate a quarter point, to 2.5%. The European Central Bank and the Bank of Japan both meet Thursday and are expected to hold their rates unchanged.

The U.S. economy gives Warsh room to act. Unemployment sits low at 4.2%, even if hiring is sluggish. The government reports July-September growth on Thursday, forecast to reach 3% according to FactSet, up from 2.2% in the April-June quarter. Many economists argue that solid growth shows rates are not particularly high — and that the economy could withstand higher ones to fight inflation.