Federal Reserve Interest Rate Decision Approaches
The Federal Reserve is gearing up to announce its latest interest rate decision on Wednesday, coinciding with the midterm elections coming up in less than a week.
Officials from the Fed have indicated that they try to keep political factors out of their monetary policy decisions. Still, there’s often some hesitancy to modify interest rates close to an election.
Inflation has remained persistently high, and the September consumer price index (CPI) data revealed inflation jumped more than anticipated, with the headline CPI climbing 0.6% month-over-month and 3.7% year-over-year. This is notably above the central bank’s target of 2% for inflation.
Heather Long, the chief economist at Navy Federal Credit Union, shared in an interview that while the September inflation figures were stronger than expected, raising the chances of an October rate hike, it seems likely the Fed will hold off and wait until December instead.
“This hotter than expected inflation data did increase the chance of an October rate hike, but it’s a very high bar to increase in October,” she explained. “They would be doing it just a week before the election. I know they like to say they’re not influenced by politics, but it’s a considerable hurdle for them.”
She continued, “Currently, the data suggests the Fed should act again, but it’s not urgent. They could choose to wait until December instead.”
Long noted that gas prices have eased a bit from their September peaks, implying that October’s data might not be stellar, but could show a bit of relief compared to the current situation. “The Fed can make a reasonable argument to wait a few more weeks to better understand the breadth of this inflation issue,” she added.
The market largely expects the Fed to keep rates steady this week, with the CME FedWatch tool indicating a 90.6% likelihood that rates remain in the current range of 3.75% to 4%. This is an increase from 84.5% a week prior and 35.8% a month ago.
Looking ahead to the Fed’s meeting in mid-December, there’s a 75.1% chance of a 25-basis-point rise in interest rates, which could signal a resumption of the rate-hiking trend if inflation continues to be problematic.
“The Federal Reserve will definitely hike interest rates again, probably in December,” Long stated. “The larger question is how many hikes may follow that? What stands out from the recent inflation data is the widespread areas of rising prices: used vehicles, airfare, recreational activities, auto repairs, and healthcare expenses.”
“It seems likely that the Fed will need to implement a few more rate hikes in 2027, and the situation of elevated borrowing costs and mortgage rates above 7% could persist for at least a year, if not longer,” Long concluded.
The CME FedWatch tool indicates the market is expecting several rate hikes by March, with a 46.5% probability that rates will increase by 50 basis points above current levels, placing them in the range of 4.25% to 4.5%.
