The US Federal Reserve is expected to leave interest rates unchanged on Wednesday during its last rate-setting meeting before the midterm elections, keeping rates at one of the highest pre-election levels seen in over 20 years. Last month, Fed officials raised rates for the first time since 2023, citing rising inflation. Inflation has hovered for years above the Fed’s target rate of 2%, and for most of this year, the annualized inflation rate has remained above 3%.
The move infuriated Donald Trump, who said that “interest rates in the United States should be 1% or less”. Though inflation rose higher in September, going from 3.4% in August to 3.7%, a pause would signal the central bank is taking a wait-and-see approach ahead of the midterms next week. Interest rates determine the cost of interest for loans, including for credit cards, mortgage and some savings accounts.
During times of high inflation, raising rates can slow price increases. Multiple Fed leaders have suggested in recent weeks that the central bank has room for a pause, even if most Fed economists are predicting one more rate hike before the end of the year. The proximity of the election also makes it more likely that the Fed will “not take any radical action”, said Nicholas Economides, a professor of economics at the NYU Stern Business School.
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.
The higher cost of living is expected to play a crucial role in the upcoming midterm elections that will determine which party will control Congress. Across multiple polls, the economy has been cited as the top issue for voters. By itself, hiking interest rates cannot solely address inflation caused by supply shocks, Economides said.
Raising rates is helpful for when the economy is too hot, or when demand outpaces supply, but can be counterproductive otherwise. That’s what we’re tasked to do, and that’s what we will do.”
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