Fed to hold rates at 4% amid 3.7% inflation and election week

The Federal Reserve is expected to leave its benchmark interest rate unchanged at the top of the 3.75% to 4% range during its October meeting. This decision comes as the annual inflation rate hits 3.7% and crude oil prices climb to a five-month high due to the ongoing conflict with Iran.

The central bank raised rates by 25 basis points last month. That move marked its first hike since 2023. Traders currently price in less than a 10% chance of another increase at this week's meeting. However, nearly 75% of market participants expect at least one more hike before the year ends.

The September consumer price index showed another rise in costs. The producer price index also increased as surging oil prices spread through the supply chain. Heather Long, chief economist at Navy Federal Credit Union, stated that inflation remains the primary problem in the U.S. economy. She noted that signs indicate the issue is becoming more broad-based.

Long added that the timing matters because the meeting occurs right before the election. She suggested the Fed will not hike in October to avoid disrupting the political cycle. The upcoming vote determines which party holds power in Washington. Historically, the Fed has maintained its course during midterm years. Mark Shore, director and economist at CME Group, noted that previous hikes near midterms in 1978, 1982, 2018, and 2022 were all driven by rising inflation.

Fed Chairman Kevin Warsh has committed to returning inflation to the 2% target. Aditya Bhave, an economist at Bank of America, warned in a research note on October 23 that a hold could lead markets to question the Fed's credibility. The benchmark rate influences what banks charge for overnight loans. That rate then ripples out to consumer borrowing and savings products.

Higher rates ease inflationary pressure but raise immediate borrowing costs. Mark Zandi, chief economist at Moody's, said longer-term rates are causing more damage to consumer wallets. He explained that these rates weigh heavily on refinancing activity, homebuying, and vehicle sales. Short-term rates also hurt by raising costs on credit cards and home equity lines.

Most credit cards carry variable rates that track the Fed's benchmark closely. If the Fed holds rates, average credit card APRs will likely stay near the current 23.96%. Mortgage rates are driven more by Treasury yields and the economic outlook. The yield on the 10-year U.S. Treasury remains near 5%, keeping the average 30-year fixed mortgage rate close to 7.4%.

Auto loan rates remain elevated, pushing many buyers to take on larger loans and extend repayment terms. Federal student loan rates for new borrowers are already higher for the current academic year based on May's auction results. Savers benefit from the higher-for-longer outlook, as high-yield accounts continue to offer attractive returns while the Fed keeps rates elevated.