By Fatma Younis
The Federal Reserve is expected to keep interest rates unchanged at its policy meeting concluding Wednesday, even as inflation has accelerated in recent months due to spikes in oil and gas prices triggered by the Iran war.
Political Context
The meeting concludes less than a week before the U.S. midterm elections, where cost-of-living concerns have dominated the campaign. Consumers have grown pessimistic about an economy weighed down by higher prices for gas, groceries, and clothing.
Inflation Accelerates Amid Iran War
Consumer prices rose 3.7% in September compared with a year earlier, up from 2.4% in February before the conflict. The consumer price index increased 0.3% in both August and September, a pace that would exceed the Fed's 2% target if sustained. A separate measure, the personal consumption expenditures price index, is forecast to have jumped 3.6% in September, with core prices rising 3.1%.
Fed Chair Warsh Faces Pressure
Chairman Kevin Warsh, who led the Fed's first rate hike in three years last month, faces criticism from President Donald Trump over the increase. Warsh will hold a press conference after the decision, likely reiterating the Fed's desire for a “timelier” return to the 2% inflation target. Investors widely expect a rate hike at the next meeting in December.
Mortgage Rates Hit Three-Year High
The average 30-year mortgage rate reached 7.4% earlier this month, making homeownership unaffordable for 5 million more Americans since the start of the year, according to Oxford Economics. Higher borrowing costs are also affecting auto loans and credit cards.
Economists Warn of Persistent Inflation
Aditya Bhave, head of U.S. economics at Bank of America, said the Fed has become too complacent about above-target inflation. He warned that higher energy prices will keep inflation elevated for months and that rising diesel costs could spread inflation broadly. “Unless the Fed takes this problem more seriously ... we're not going to get back to 2% until the next recession,” Bhave said.
Global Central Banks Also Meeting
The Fed's meeting coincides with policy decisions by other major central banks. The Bank of Canada is forecast to raise its key rate to 2.5%, while the European Central Bank and the Bank of Japan are expected to hold rates steady. The U.S. economy grew at an estimated 3% annual rate in the third quarter, with unemployment at 4.2%, suggesting the economy could withstand higher rates.
