Fed expected to hold rates steady on 28 October despite hot inflation

The decision on 28 October

The Federal Reserve announces its rate decision at 19:00 on 28 October, less than a week before the US midterm elections. Most economists expect the key rate to stay in the range of 3.75% to 4%, the level set in September. Wirtschafts Woche and The New York Times both give that range, while AP describes the September move as taking rates from about 3.6% to 3.9%, so sources report the band differently. The September increase was the Fed's first since July 2023. Chairman Kevin Warsh will take questions at a news conference after the decision, where his wording on the next steps will be closely watched. President Donald Trump criticised the September move but largely blamed the rate-setting committee rather than Warsh, whom he appointed.

Inflation keeps running hot

Consumer prices rose 3.7% year on year in September, close to the highest level in more than three years, driven mainly by energy costs after oil and gas prices climbed during the Iran war. Fitch Ratings calculates that 46% of US consumer price index components rose more than 3% year on year in September, twice the share seen in the 2018-2019 period. The comparable shares were 36% in the eurozone and 32% in Canada. Axios reports that the hawkish wing of the policy committee has started raising concerns more vocally, and that several dissents are possible at the 28 October meeting. Cleveland Fed president Beth Hammack described the pressures earlier this month in these words:

“I see inflation pressures as relatively broad-based rather than concentrated in one component.”

Her comments point to price pressure beyond energy, which is the main concern for officials who want a faster return to the 2% target.

United States46%

Eurozone36%

Canada32%

United States

46 %

Eurozone

36 %

Canada

32 %

Data from the article text

Jobs and mortgages

The labour market has held up better than prices. Unemployment remained low in September, and weekly jobless claims hovered near multidecade lows, according to Axios. Monthly job growth did slow in September, a shift The New York Times describes as a sign that the Fed's settings are not excessively tight for the economy. The average 30-year mortgage rate reached a three-year high of 7.4% in October and has since eased slightly. Oxford Economics estimates that 5 million more Americans have been priced out of buying a home since the start of the year because of higher mortgage rates.

Markets and the December meeting

Futures contracts assign only about 10% probability to a move in the policy range from 3.75% to 4% up to a range of 4% to 4.25%, according to El País. Investors mostly expect an increase in December, a meeting held after the midterm elections. Numerous Fed policymakers have already signalled support for a rate rise at the final meeting of the year, aimed at a timelier return to the 2% target after six years of overshooting it. Loretta Mester, who ran the Federal Reserve Bank of Cleveland until 2024, made the case for moving again:

“The economics support another rate increase.”

UBS analysts expect Warsh to tell reporters that the central bank still has work to do on inflation, a message they link to the proximity of the elections.

What Warsh has to explain

Warsh has generally avoided offering explicit guidance on the next steps. AP expects him to repeat the Fed's wish for a "timelier" return of inflation to the 2% target. If the Fed holds rates, he will be pushed to explain why the pause fits that goal, and Axios notes that the optics look poor if the pause appears designed to avoid a move right before the midterm elections. The next policy meeting, in December, is the one where a further increase is widely expected by Wall Street investors.