The Federal Reserve is expected to leave interest rates unchanged at its next meeting in October, even as rising energy costs complicate the inflation outlook and put additional pressure on household budgets.
The consumer price index, a broad measure of inflation, rose again in September, bringing the annual inflation rate to 3.7%. Soaring oil prices resulting from the U.S.-Iran war also contributed to the rise in September’s producer price index. Brent crude oil traded at a five-month high on Friday before falling slightly.
The Fed raised rates by 25 basis points to a range of 3.75% to 4% last month, its first hike since 2023. But federal funds futures last priced a less than 10% chance that the central bank would raise rates by another quarter point at its meeting this week, according to CME Group’s FedWatch tool. Nearly 75% expect at least one increase by the end of the year.
“Inflation remains the No. 1 problem in the U.S. economy, and there are many signs that it is becoming more widespread,” said Heather Long, chief economist at Navy Federal Credit Union. “For consumers, this means very high borrowing costs for the foreseeable future.”
However, “given that it’s just before the elections,” she added, “they won’t make an increase in October.”
The next central bank meeting will take place just days before the midterm elections and will mark the final word on the pace of inflation in the United States before voters go to the polls, which could impact the power of each political party in Washington.
In past election cycles, the Fed has mostly stayed on course, research shows. The Fed’s four midterm rate increases — 1978, 1982, 2018 and 2022 — were all linked to higher inflation, according to Mark Shore, director and economist at the CME Group.
Fed Chairman Kevin Warsh has pledged to return inflation to the Fed’s 2% target. “If the Fed holds its ground, markets could question its credibility in fighting inflation,” Aditya Bhave, an economist at Bank of America, said in an Oct. 23 research note.
How the Fed Affects Your Money
The Fed’s benchmark interest rate determines what banks charge each other for overnight loans. This rate then influences a wide range of consumer borrowing and saving rates. However, while higher interest rates can help ease inflationary pressures, they also increase short-term borrowing costs, worsening the affordability crisis many households already face.
Short-term rates are closely tied to the prime rate, which is typically 3 percentage points above the federal funds rate. Long-term borrowing costs, meanwhile, depend more on inflation expectations and broader economic conditions.
“Rising long-term rates are causing more damage to consumers’ wallets because they have risen more than short-term rates and are weighing heavily on refinancing activity, home buying and vehicle sales,” said Mark Zandi, chief economist at Moody’s. “Rising short-term rates also hurt, but mainly by increasing rates on credit cards, consumer loans and home equity lines.”
Most credit cards have variable rates that move closely with the Fed’s benchmark rate. As a result, if the Fed leaves rates unchanged, credit card APRs will likely remain near current levels. The average interest rate on a new credit card offer is now 23.96%, according to LendingTree.
In contrast, mortgage rates are more influenced by Treasury yields and the economic outlook. The yield on the 10-year U.S. Treasury, which serves as a benchmark for many long-term loans, has been near 5%, helping to keep the average rate on a 30-year fixed mortgage near 7.4%, according to Mortgage News Daily.
Auto loan rates are determined by several factors, including the Fed’s benchmark rate. With financing costs still high, many car buyers are taking out larger loans and extending repayment terms to deal with affordability concerns, according to Edmunds.
Federal student loan rates are fixed for the life of the loan, but rates for new borrowers are already higher for the current academic year, based on the results of the 10-year Treasury bond auction held in May.
Savings rates tend to follow changes in the federal funds rate, which is a rare positive for the outlook for higher rates in the long term. Because the Fed has kept rates high, savers continue to enjoy relatively attractive returns on high-yield savings accounts and other deposit products.
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