Fed seen holding rates steady before midterms

The US Federal Reserve is widely expected to keep its benchmark interest rate unchanged at its meeting next week, even as inflation remains stubbornly above target. The Federal Open Market Committee will meet over two days, with its decision scheduled for 2:00 pm local time (18:00 GMT) on Wednesday. At its September meeting, the Fed raised the federal funds rate for the first time in three years, setting the target range at 3.75% to 4.0%, and markets still anticipate at least one more increase before the end of the year. The upcoming decision comes just days before the November 3 midterm elections, adding political scrutiny to an already complex policy backdrop.

Analysts expect the central bank to hold rates steady for now while leaving the door open to additional tightening later in the year. Bets on an October hike have eased as signs of cooling in parts of the job market emerge, even though the broader labour picture remains relatively stable. Holding rates next week would give policymakers more time to assess incoming inflation and growth data before deciding whether to act again in December.

The Fed has missed its 2% inflation goal for more than five years, and price pressures remain elevated. Its preferred gauge, the Personal Consumption Expenditures price index, fell from a pandemic-era peak of 7.2% in 2022 to around 2.2% by late 2024, but later climbed to a three-year high of 3.9% in May amid renewed shocks. Economists now expect the PCE report for September to show inflation running at a 3.7% rate, up from 3.4% in August, with prices rising across categories such as gasoline, clothing and groceries.

A sharp rise in global energy prices has added to inflation pressures since the United States and Israel attacked Iran in late February, and Tehran’s retaliation has restricted oil and gas flows through the Gulf. The effective shutdown of the Strait of Hormuz has tightened global oil supply, pushing up fuel costs and feeding into broader consumer prices. Higher energy and goods prices have weighed on households, with consumer confidence plunging to its lowest level in more than a decade in September and remaining under pressure.

GDP growth has been slowing under the strain of higher oil prices and already elevated inflation, although it is still supported by a strong stock market and business investment in artificial intelligence technology. At the same time, households are contending with higher costs for essentials while average wages have stagnated, eroding purchasing power. The Fed also faces the task of containing inflation while monitoring signs of stress in an otherwise resilient jobs market and weakening consumer confidence.

Former Cleveland Fed regional head Loretta Mester argues that the incoming data, including a stable labour market and inflation above target, would justify further rate increases. She sees no clear evidence that inflation is on a sustained path back toward 2%, suggesting that “the economics would suggest then you need to continue raising rates.” However, she also notes that many policymakers seem reluctant to move too quickly, reflecting the cross‑currents in the data.

The timing of the meeting, just days before the midterm elections in which Democrats are seeking to take control of both houses of Congress from President Donald Trump’s Republicans, has sparked questions about political influence on policy. Mester maintains that the Fed does not factor political considerations into its deliberations, emphasizing that decisions are based on economic conditions. Wendy Edelberg of the Brookings Institution adds that it is preferable for the central bank not to become part of pre‑election political debate, arguing that a possible rate move in December rather than October would have limited economic impact.

Trump has repeatedly criticized the Federal Reserve over interest rates, which he argues are too high, and has mounted a broad challenge to the central bank’s independence since returning to power. His administration launched a criminal investigation into former chair Jerome Powell and attempted to remove Fed Governor Lisa Cook. Despite this pressure, he has so far avoided direct attacks on current Fed Chair Kevin Warsh over interest rate decisions, even as the central bank weighs further tightening while keeping rates steady ahead of the elections.