Fed likely to hold rates steady in October amid rising inflation
The Federal Reserve is expected to leave interest rates unchanged at its upcoming October meeting, despite a rise in the annual inflation rate to 3.7% in September. The decision comes as surging oil prices from the U.S. war with Iran complicate the inflation outlook and pressure household budgets. Brent crude oil traded at a five-month high on Friday before falling slightly, contributing to higher producer prices.
The Federal Reserve is expected to leave interest rates unchanged at its upcoming October meeting, despite a rise in the annual inflation rate to 3.7% in September. The decision comes as surging oil prices from the U.S. war with Iran complicate the inflation outlook and pressure household budgets. Brent crude oil traded at a five-month high on Friday before falling slightly, contributing to higher producer prices.
The central bank raised rates by 25 basis points to a range of 3.75% to 4% last month, marking its first hike since 2023. According to the CME Group's FedWatch tool, Fed funds futures price in less than a 10% chance of another quarter-point increase at this week's meeting. Nearly 75% of market participants expect at least one hike by year-end.
Heather Long, chief economist at Navy Federal Credit Union, stated that inflation remains the primary economic problem and is becoming more broad-based. She noted that for consumers, this means high borrowing costs for the foreseeable future, but added that the Fed will not hike in October given the proximity of the midterm elections. The meeting occurs just days before voters head to the polls, which could impact political power in Washington.
Historical data shows the Fed has generally maintained its course near midterm elections. Mark Shore, director and economist at CME Group, noted that the four instances where the Fed raised rates near a midterm in 1978, 1982, 2018, and 2022 were all tied to rising inflation. Fed Chairman Kevin Warsh has expressed a commitment to bringing inflation down to the 2% target. Aditya Bhave, an economist at Bank of America, warned in a research note on Oct. 23 that if the Fed holds, markets could question its inflation-fighting credibility.
The benchmark interest rate influences consumer borrowing and savings costs. While higher rates can ease inflationary pressures, they also raise near-term borrowing costs. Shorter-term rates track the prime rate, typically set 3 percentage points above the federal funds rate. Mark Zandi, chief economist at Moody's, observed that higher longer-term rates are damaging consumer wallets more than short-term rates by weighing on refinancing, homebuying, and vehicle sales.
Most credit cards carry variable rates tied closely to the Fed's benchmark. If rates remain unchanged, credit card APRs are likely to stay near current levels. LendingTree reports the average interest rate on a new credit card offer is now 23.96%. Mortgage rates are influenced more by Treasury yields; with the 10-year U.S. Treasury yield near 5%, Mortgage News Daily reports the average 30-year fixed mortgage rate remains close to 7.4%.
Auto loan financing costs remain elevated, leading many buyers to take on larger loans and extend repayment terms according to Edmunds. Federal student loan rates for new borrowers are already higher for the current academic year based on May's 10-year Treasury note auction results. Savers continue to benefit from relatively attractive yields on high-yield savings accounts as a result of the higher-for-longer rate outlook.