Federal Reserve poised to hold rates steady ahead of midterms

The Federal Reserve is expected to keep its benchmark interest rate unchanged at its meeting this week, despite a recent uptick in inflation. The consumer price index, a broad gauge of prices, climbed in September, pushing the annual inflation rate to 3.7%. Higher energy costs, driven by the U.S. conflict with Iran, also contributed to a rise in producer prices. Brent crude oil traded at a five-month high on Friday before experiencing a slight pullback.

The central bank last increased rates by 25 basis points to a range of 3.75% to 4% in September. This marked the Fed’s first rate hike since 2023. Market instruments suggest a pause is imminent. According to the CME Group’s FedWatch tool, fed funds futures currently price in a less than 10% probability of another 25 basis point increase this week. However, nearly 75% of market participants expect at least one additional hike before the end of the year.

Heather Long, chief economist at Navy Federal Credit Union, noted that inflation remains the primary economic challenge. She stated that signs indicate price pressures are becoming more broad-based. For consumers, this translates to sustained high borrowing costs. Long added that the timing of the decision is strategic. Because the meeting occurs just before the election, she believes the Fed will avoid hiking rates in October.

The upcoming decision marks the final inflation data release before the midterm elections. This timing could influence how voters perceive the economic climate and potentially shift political power in Washington. Historical data shows the Fed has generally maintained its course during such periods. Mark Shore, an economist at the CME Group, pointed out that the four instances of rate hikes near midterms in 1978, 1982, 2018, and 2022 all coincided with rising inflation.

Fed Chairman Kevin Warsh has previously committed to returning inflation to the bank’s 2% target. Aditya Bhave, an economist at Bank of America, wrote in a research note on October 23 that a decision to hold rates might prompt the market to question the Fed’s credibility in fighting inflation. The benchmark rate dictates the cost for banks to lend to one another overnight, which then ripples through consumer borrowing and savings rates.

Mark Zandi, chief economist at Moody’s, observed that higher long-term rates are causing more financial strain on households than short-term rates. He explained that elevated long-term costs are weighing on refinancing, home buying, and vehicle sales. Short-term rates primarily affect credit cards, consumer finance loans, and home equity lines of credit. Most credit cards feature variable rates that track the federal funds rate closely. If the Fed holds steady, these rates are likely to remain at current levels. The average interest rate on a new credit card offer stands at 23.96%, according to LendingTree.

Mortgage rates are influenced more by Treasury yields and economic outlooks than by direct Fed actions. The yield on the 10-year U.S. Treasury has hovered near 5%, keeping the average 30-year fixed mortgage rate close to 7.4%, per Mortgage News Daily. Auto loan rates are shaped by multiple factors, including the Fed’s benchmark. Edmunds reports that many car buyers are extending repayment terms to manage higher financing costs. Federal student loan rates for new borrowers are set based on the May 10-year Treasury note auction. Conversely, savings rates tend to follow the federal funds rate, providing a benefit to savers through higher yields on deposit products.