Fed expected to hold rates steady before midterms

The Federal Reserve is expected to leave interest rates unchanged on Wednesday.

This decision comes less than a week before the midterm elections, a period when voters are focused on the cost of living. Inflation has accelerated in recent months due to the Iran war, which has driven up oil and gas prices. The Fed aims to return inflation to its 2% target, typically by raising short-term interest rates to cool spending.

Chairman Kevin Warsh raised the key rate last month for the first time in three years, moving it from about 3.6% to 3.9%. Many investors viewed that move as the start of a renewed push to lower inflation. However, President Donald Trump criticized the central bank for the hike, though he largely blamed the rate-setting committee rather than Warsh. Warsh also faces challenges because some inflation drivers, such as artificial intelligence infrastructure and energy costs, are not easily controlled by interest rates.

Higher rates are already affecting consumers. The average 30-year mortgage rate hit a three-year high of 7.4% earlier this month. According to Oxford Economics, this has made home buying unaffordable for 5 million more Americans since the start of the year. While mortgage rates have slipped slightly since that peak, they remain a major concern for households.

Inflation data supports the view that prices are rising too quickly. Consumer prices rose 3.7% in September compared with a year earlier, a sharp increase from the 2.4% rate in February before the Iran war. The consumer price index rose 0.3% in both August and September. A separate measure, the personal consumption expenditures price index, is forecast to jump to 3.6% in September from 3.4% in August. Core prices, which exclude food and energy, are expected to rise to 3.1% from 3%.

Aditya Bhave, head of U.S. economics at Bank of America, warned that economists and the Fed have become too complacent about above-target inflation. He noted that rising diesel costs will increase shipping prices for most goods, potentially spreading inflation across the economy. Bhave argued that without a more serious response, the Fed might not reach its 2% target until the next recession.

The U.S. economy remains strong, with unemployment at 4.2% and growth expected to reach 3% in the third quarter. This solid performance suggests the economy can withstand higher rates. Warsh is expected to keep his Wednesday news conference brief, likely repeating the Fed's desire for a timelier return to the 2% target. Wall Street investors already expect a rate hike at the December meeting.