The Federal Reserve is expected to leave its key interest rate unchanged on Wednesday, even though inflation has picked up in recent months as the Iran war has pushed up oil and gas prices. The decision comes less than a week before the midterm elections, which have centered heavily on the cost of living and affordability.
Consumers have grown increasingly pessimistic about an economy weighed down by more expensive gasoline, groceries and clothing, among other goods. The Fed, led by Chairman Kevin Warsh, wants to return inflation to its 2% target. It typically does so by raising its short-term interest rate, since higher borrowing costs can cool spending and slow price increases over time.
The central bank raised its key rate last month for the first time in three years, from about 3.6% to 3.9%. Many investors and economists saw that move as a first step toward a renewed push to bring inflation down. Warsh, however, faces a number of obstacles. President Donald Trump criticized the Fed for the increase, though he largely directed his criticism at the central bank's rate-setting committee rather than at Warsh, whom he appointed.
Some of the forces driving inflation will not be easy to tame with higher rates. These include the rapid buildout of artificial intelligence infrastructure and higher energy prices. Other parts of the economy are already feeling the pressure of borrowing costs that rose through market forces even before the Fed acted last month. The average 30-year mortgage rate reached a three-year high of 7.4% earlier this month before slipping somewhat. According to the consulting firm Oxford Economics, higher mortgage rates have made buying a home unaffordable for 5 million more Americans since the start of the year.
Over time, Fed rate increases can also make mortgages, auto loans and credit card borrowing more expensive, adding to Americans' sense that homes and cars are becoming pricier. Warsh is scheduled to hold a news conference after the decision, and analysts will be watching his remarks for clues about the Fed's next move. He is likely to repeat the central bank's desire for a “timelier” return of inflation to the 2% target. Some may read that as a sign the Fed will raise its key rate at its December meeting, a step that Wall Street investors already widely expect.
If the Fed holds rates steady, Warsh will face questions about why the central bank raised rates in September but not this month. Inflation picked up in September, when consumer prices rose 3.7% from a year earlier, a sharp increase from the 2.4% rate in February, just before the Iran war began. The consumer price index, the most closely watched inflation gauge, rose 0.3% in both August and September. If that monthly pace continued for a full year, inflation would run well above the Fed's 2% target.
A separate measure that the Fed follows closely, the personal consumption expenditures price index, is forecast to have risen 3.6% in September from a year earlier, up from 3.4% in August. Core prices, which exclude food and energy, are forecast to have climbed 3.1%, up from 3% the previous month. Those figures are due Thursday.
Aditya Bhave, head of U.S. economics at Bank of America, said economists and the Fed have grown too complacent about inflation running above target. He said higher oil and gas prices will likely keep inflation elevated for several more months, and rising diesel costs could lift shipping prices for nearly every type of good, spreading inflation more broadly through the economy. “Unless the Fed takes this problem more seriously and stops essentially making excuses about inflation, I think we're not going to get back to 2% until the next recession,” Bhave said.
Warsh is expected to keep Wednesday's press conference relatively short, after one of about 30 minutes last month. His predecessor, Jerome Powell, often held news conferences lasting about 45 minutes. The Fed meeting is part of a busy week for central banks worldwide. The Bank of Canada also meets Wednesday and is forecast to raise its key rate a quarter point, to 2.5%. The European Central Bank and the Bank of Japan are both scheduled to meet Thursday and are expected to keep their key rates unchanged.
For the Fed, another important consideration is that the U.S. economy is growing at a healthy pace and unemployment remains low, at 4.2%, even though hiring has been sluggish. The government will report Thursday on growth for the July-September quarter, which FactSet, a data provider, forecasts will reach 3%, up from 2.2% in the April-June quarter. Many economists argue that solid growth suggests interest rates are not especially high and that the economy could absorb further increases to fight inflation.