Federal Reserve expected to hold interest rates steady ahead of midterms

LOWER THE INTEREST RATES FOR THE UNITED STATES OF AMERICA, AND FAST! President Donald Trump said in a social media post. The Federal Reserve is set to issue an interest rate decision on Wednesday as a surge of inflation puts pressure on central bankers to raise rates days before the midterm elections.

The Federal Reserve's benchmark interest rate currently stands between 3.75% and 4%. That level is a notable drop from a recent peak attained in 2023, but rates stand well above a 0% level established at the outset of the COVID-19 pandemic. Last month, the central bank raised interest rates a quarter of a percentage point in an effort to battle back price woes, marking the first rate increase in three years. That move drew a reprimand leveled at the Fed soon after by President Donald Trump. The Fed is an independent institution established by Congress and is typically insulated from political interference, but several past presidents have sought to influence the Fed’s interest rate policy, including Trump. The rate decision may also draw attention to the challenge posed by inflation, a top issue among voters.

Economic Crosscurrents and Inflation Pressures

Inflation rose to a four-month high in September as fuel prices climbed in response to unrest in the Middle East, according to the U.S. Bureau of Labor Statistics (BLS). Prices increased 3.7% in September compared to a year earlier, putting the inflation rate more than a percentage point above the Fed's target level of 2%, data showed. Rising prices this year have largely been driven by war in the Middle East with Iran. Oil prices have soared with the closure of the strait of Hormuz, a crucial passageway for trade. Inflation rose last month to its highest level since the spring, while oil traded briefly above $117 a barrel earlier this week, its highest price in more than six months.

Employers added 29,000 jobs in September, a sharp slowdown from the 162,000 jobs added in August, the BLS said. The job gains came in well below economists' expectations. While the unemployment rate rose in September from 4.1% the prior month, it’s been mostly flat for the past year. Second quarter gross domestic product came in at an annual rate of 2.2%, a much more robust pace than the government initially estimated, with much of that growth connected to AI related spending.

If inflation is caused by supply factors, it doesn’t make sense to try to cure it by increasing interest rates because it won’t work, said Nicholas Economides, a professor of economics at the NYU Stern Business School. Raising rates is helpful for when the economy is too hot, or when demand outpaces supply, but can be counterproductive otherwise, as it will slow down the economy at a time in which you don’t want it to slow down.

Fed chair Kevin Warsh has suggested, however, that present-day inflation has persisted beyond the war, and the central bank’s decision to raise rates was to prevent prices from creeping up further. We cannot affect any individual price, whether it be oil prices, whether it be foodstuffs at the grocery store, Warsh said at the Fed’s September meeting. But what we can do, and will do, is ensure that any change in relative prices don’t broaden out, don’t have second and third-order effects on the economy. That’s what we’re tasked to do, and that’s what we will do.

Market Expectations and Political Stakes

Investors put the chance of the Fed holding rates steady on Wednesday at about 90%, according to CME Group’s FedWatch Tool, a measure of market sentiment. Bank of America Global Research said in a memo to clients last week, If the Fed hikes, investors might worry about overtightening. If the Fed holds, markets could question the Fed's inflation-fighting credibility. Deutsche Bank Research said the upcoming midterms could factor into a potential decision to hold interest rates steady, though in their view the election would not be a "primary consideration," noting that the Fed might prefer to stay out of the headlines for raising rates just ahead of a midterm election where affordability is the principal concern. The odds of a quarter-point rate hike at the Fed's next meeting in December are pegged at 75%, the tool shows.

1. October 19-26: A survey of 707 voters is conducted, putting the South Carolina Senate race within the margin of error.
2. September 28: A customer walks down the aisle in a supermarket in Manhattan, New York.
3. September 16: Federal Reserve Chairman Kevin Warsh takes questions from reporters during a news conference in Washington, DC.
4. Wednesday: The Federal Reserve is set to issue an interest rate decision, with a press conference at 2:30 p.m. featuring Chairman Warsh.
5. Thursday: Two pieces of data are set to come out just one day after the Fed’s two day meeting: the Personal Consumption Expenditures price index and an initial read of third quarter GDP.

At his 2:30 p.m. press conference, Fed Chairman Kevin Warsh is likely to face questions on the Fed’s next move, and his answers may be brief as Warsh has come out strong against any “forward guidance.” Warsh may also face questions as to whether the Fed held off on a hike because of political pressure just days before the midterm elections.