Fed expected to hold rates steady ahead of midterm elections

The Federal Reserve is expected to leave its benchmark interest rate unchanged at its meeting later this week. This decision comes as high energy costs continue to strain household budgets across the country.

Consumer prices rose in September, pushing the annual inflation rate to 3.7%. Oil prices jumped due to the U.S. conflict with Iran, which also drove up producer prices. Brent crude oil traded at a five-month high on Friday before dipping slightly. The Fed raised rates by 25 basis points to a range of 3.75% to 4% last month. That was the central bank's first increase since 2023. Market data from the CME Group's FedWatch tool shows a less than 10% chance of another hike this week. Nearly 75% of futures contracts price in at least one hike by the end of the year.

The meeting occurs days before the midterm elections. This timing offers a final look at the inflation pace before voters head to the polls. Heather Long, chief economist at Navy Federal Credit Union, noted that inflation is the top problem in the economy and is becoming more broad-based. She stated that consumers should expect high borrowing costs for the foreseeable future. Long added that the Fed likely will not hike rates in October because the meeting falls right before the election. Mark Shore, an economist at CME Group, pointed out that the Fed has raised rates near midterms four times in history. Those years were 1978, 1982, 2018, and 2022. All four instances were linked to rising inflation.

Fed Chairman Kevin Warsh has pledged to bring inflation down to the 2% target. Aditya Bhave, an economist at Bank of America, warned that holding rates steady might make markets question the Fed's credibility. The benchmark rate affects what banks charge for overnight loans. It then influences consumer borrowing and savings rates. Higher rates can cool inflation but also make borrowing more expensive. Short-term rates are tied to the prime rate, which is usually three points above the federal funds rate. Longer-term rates depend more on inflation expectations.

Mark Zandi, chief economist at Moody's, said higher long-term rates are hurting consumer wallets more than short-term rates. These higher costs are slowing down homebuying, refinancing, and vehicle sales. Short-term rates mainly raise the cost of credit cards and home equity lines. Most credit cards have variable rates that track the Fed's benchmark. If the Fed holds rates steady, credit card interest rates will likely stay near current levels. LendingTree reports the average interest rate on a new credit card offer is 23.96%.

Mortgage rates are driven by Treasury yields and the economic outlook. The 10-year U.S. Treasury yield has stayed near 5%. This helps keep the average 30-year fixed mortgage rate close to 7.4%, according to Mortgage News Daily. Auto loan rates are also shaped by the Fed's benchmark. Edmunds notes that many car buyers are taking out larger loans and extending repayment terms to afford vehicles. Federal student loan rates for existing borrowers are fixed. However, rates for new borrowers are already higher this academic year based on a May Treasury auction.

Savings rates typically follow the federal funds rate. Higher rates provide a benefit to savers who earn attractive yields on high-yield savings accounts. The Fed will announce its decision on interest rates at its scheduled meeting this week. This outcome will set the stage for borrowing costs in the months following the election.