The Federal Reserve is expected to leave interest rates unchanged at its upcoming October meeting – although higher energy costs are weighing on inflation prospects and putting additional pressure on household budgets.
The consumer price index, a broad measure of inflation, rose again in September, bringing the annual inflation rate to 3.7%. Rising oil prices due to the US war with Iran also helped push the September producer price index higher. On Friday, Brent crude traded at a five-month high before easing slightly.
The Fed raised rates by 25 basis points to a range of 3.75% to 4% last month, the first hike since 2023. But Fed funds futures last priced at less than 10% chance the central bank will raise rates by another quarter point at its meeting this week, according to CME Group’s FedWatch tool. Nearly 75% expect at least one increase by the end of the year.
“Inflation is still the No. 1 problem in the U.S. economy, and there are many signs that it has become more broad-based,” said Heather Long, chief economist at Navy Federal Credit Union. “For consumers, that means very high borrowing costs for the foreseeable future.”
However, “because before the election,” he added, “he will not go up in October.”
The upcoming central bank meeting comes just days before the midterm elections and marks the final word on the rate of inflation in the US before voters go to the polls, which could affect the strength of each political party in Washington.
In previous election cycles, the Fed has mostly maintained its projected path, research shows. The four times the Fed raised rates near the midterms — 1978, 1982, 2018 and 2022 — were all tied to rising inflation, according to Mark Shore, director and economist at CME Group.
Fed Chairman Kevin Warsh has expressed his commitment to lowering inflation to the Fed’s 2% target. “If the Fed holds, markets may question the Fed’s credibility in fighting inflation,” Bank of America economist Aditya Bhave said in a research note on Oct. 23.
How the Fed affects money
The Fed’s benchmark interest rate determines what banks charge each other for overnight loans. These levels then affect the various levels of consumer debt and savings. However, while higher interest rates may help reduce inflationary pressures, they also raise borrowing costs in the near term, adding to the affordability crisis many households are already facing.
Shorter-term rates are tied to the prime rate, which is typically 3 percentage points above the federal funds rate. Long-term borrowing costs, meanwhile, are driven more by inflation expectations and broader economic conditions.
“Higher long-term rates are causing more damage to consumers’ wallets, as they have risen more than short-term rates, and weigh heavily on refinancing activity, home purchases and vehicle sales,” said Mark Zandi, Moody’s chief economist. “Higher short-term rates also hurt, but mostly by raising rates on credit cards, consumer finance loans and home equity lines.”
Most credit cards carry variable rates close to the Fed’s benchmark rate. As a result, if the Fed does not change rates, credit card APRs will remain close to their current levels. The average interest rate on new credit card offers is currently 23.96%, according to LendingTree.
Mortgage rates, by contrast, are more influenced by Treasury yields and the economic outlook. The yield on the 10-year U.S. Treasury, which is the benchmark for many long-term loans, has been near 5%, helping keep the average rate on a 30-year fixed mortgage near 7.4%, according to Mortgage News Daily.
Auto loan rates are shaped by several factors, including the Fed’s benchmark rate. With financing costs still rising, many car buyers are taking out larger loans and extending repayment terms to overcome affordability challenges, according to Edmunds.
Federal student loan rates are fixed for the life of the loan, but rates for new borrowers have been higher this academic year based on the results of the 10-year Treasury note auction held in May.
Savings rates tend to track changes in the federal funds rate, which is rare for higher rate prospects. Because the Fed has kept rates up, savers continue to benefit from relatively attractive yields in high-yield savings accounts and other deposit products.
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