Federal Reserve rate decision looms days before midterm elections

The Federal Reserve is expected to announce its latest interest rate decision on Wednesday, less than a week before the midterm elections.

Fed policymakers say they avoid letting politics influence their monetary policy decisions and may be reluctant to raise or cut interest rates in meetings that take place before elections.

Inflation remained stubbornly high and September Consumer Price Index (CPI) data showed that inflation rose faster than expected, with headline CPI rising 0.6% on a monthly basis and 3.7% year-on-year. The latter figure is well above the 2% inflation target set by the central bank.

Heather Long, chief economist at Navy Federal Credit Union, told FOX Business in an interview that even though September inflation data was hotter than expected and raised prospects of a rate hike in October, the Fed would likely hold off on “another hike in December.”

CONSUMER INFLATION INCREASED FASTER THAN EXPECTED IN SEPTEMBER, CPI REPORT SHOWS

Federal Reserve Chairman Kevin Warsh and policymakers are expected to keep rates steady this week. (Daniel Heuer/Bloomberg via Getty Images)

“This higher than expected inflation data increased the chances of a rate hike in October, but that’s a very high bar to raise in October, they would do it in the week after the election. I know they like to say they’re not political, but that’s a high bar for October,” she explained.

“Right now, this data indicates that the Fed needs to act again, but this is not a wake-up call. They don’t have to act immediately, they could wait until December.”

“The reality is that gas prices have come down a little bit since the September highs, so we’re expecting the October data – you know, it’s not going to be great, but it might be a little colder than what we’re seeing today. And the Fed has a reasonable case to say that we’re probably going to go higher again, but let’s wait a few more weeks and see how real this problem is,” Long said.

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The market expects the Fed to hold rates steady this week, with the CME FedWatch tool showing a 90.6% chance that rates will stay within their current target range of 3.75% to 4%, up from 84.5% a week ago and 35.8% last month.

For the Fed’s mid-December meeting, the tool shows a 75.1% probability of a 25 basis point interest rate hike, which could mark the resumption of the rate hike cycle if inflation remains high.

WHY THE FED IS NOT READY TO DECLARE VICTORY OVER INFLATION

Inflation rose faster than expected in September and remains well above the central bank’s 2% target. (Robert Nickelsberg/Getty Images)

“The Federal Reserve will definitely raise interest rates again, probably in December,” Mr. Long said. “The big question is how many more times will they have to rise after this? And what’s scary about this latest September inflation data is seeing so many areas of high inflation: see used car prices, airfares, leisure costs, auto repair costs, buying a used car, medical costs.”

“The story is really starting to take shape: It’s probably going to take a few more hikes in 2027, and these higher long-term borrowing costs and mortgage rates well above 7% are going to persist for at least another year, maybe longer,” Long said.

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The CME FedWatch tool shows the market expects multiple rate hikes between now and March, with a 46.5% chance that rates will be 50 basis points higher than they are now, in a range of 4.25% to 4.5%.