The Federal Reserve is widely expected to hold its benchmark interest rate steady when it announces its decision Wednesday, the last before the Nov. 3 midterm elections, as inflation remains above the central bank’s 2% target.1,2,3,4
Most economists and Wall Street analysts expect the Fed to leave its rate unchanged at 3.75% to 4%, after the central bank raised the federal funds rate by a quarter of a percentage point in September, its first increase in three years. Markets overwhelmingly expect no change this week, but investors will be looking for clues about future moves, particularly from Chairman Kevin Warsh. The Fed is scheduled to announce its decision at 2 p.m. ET.3,4
Inflation is the central concern behind the decision. The consumer price index showed headline inflation at an annual rate of 3.7% in September, as energy costs jumped. Gasoline prices, which have hovered above $4 a gallon for the last three months, accounted for more than half of the September increase in consumer prices, according to the Labor Department. Core inflation, which excludes volatile categories, was 2.6% and rose 0.3 percentage point from August, a level still well above the Fed’s 2% target.3,4
Other indicators are mixed. Mortgage rates above 7% have added pressure to the housing market, which has struggled further in recent data. The labor market has settled into a low-fire, low-hire pattern in which layoffs are near their lowest levels since the late 1960s, while people who are out of work struggle to find jobs. The unemployment rate, by contrast, has been fairly steady.3
The meeting comes days before Americans vote in the midterm elections on Nov. 3. Many have expressed frustration with the state of the economy as they contend with rising costs of gas, food, utilities and other expenses.1,2,4
Futures pricing points to a hold this week and a possible increase later in the year. CBS News put the probability of a hold in October at 88% and the probability of a rate increase in December at 71%, using the CME Group’s FedWatch tool. CNBC, citing the same tool, put the chance of a December increase at better than 80% and the chance of an increase this week at about 10%. Most economists and investors expect one more increase before year-end, likely at the Dec. 8-9 meeting.3,4
In quarterly projections last month, the Fed signaled that its rate-setting committee expected to raise rates later this year, though some policymakers have said the central bank is in no rush. New York Fed President John Williams said in a speech at the University at Buffalo after the September increase, "With the policy action we took at our September meeting, there is no need for urgency, and we have time to gather more information." Recent remarks from Vice Chair Philip Jefferson and Williams have been read as pointing to increases at every other meeting, though how far the Fed will need to go remains unclear.3,4
Warsh has said he is highly reluctant to signal future policy moves as he seeks to move the central bank away from the "forward guidance" practice of most of the 21st century. Brett Ryan, senior U.S. economist at Deutsche Bank, said he will be watching what Warsh signals. Ryan wrote in a note to clients that the chairman "is likely to signal that recent inflation data reinforce expectations from the September meeting that further tightening will likely be needed over time." "However, skipping October allows officials more time to assess trends in the data," he wrote.3,4
Krishna Guha, head of economics and central bank strategy at Evercore ISI, said Monday in a note that "it ought to be possible for Warsh – who is alert to market risks even though he professes not to like mollycoddling investors – to show a calming steady hand." "But there is material execution risk," Guha said. He read Warsh’s recent remarks to the World Bank and International Monetary Fund in Bangkok as aligning "with the central view" on the FOMC, which in his view points to a deliberate pace of about one increase per quarter. "If inflation continues to disappoint and/or growth momentum fails to moderate, the Fed will add more hikes," he added.3
Thomas Ryan, senior North America economist at Capital Economics, wrote in a recent research note: "Although the latest hot inflation readings and rise in inflation expectations will concern Fed officials, they still appear broadly intent on tightening policy at a measured pace." The Chicago Fed’s index of financial conditions has shown a slight tightening since the September hike, a result of stock market volatility among other factors.3,4
Stephen Moore, a former economic adviser to President Trump, said Monday that Warsh is in a "tough" position ahead of this week’s meeting. "It’s a tough position for my friend Kevin Warsh," Moore said.5
Warsh is scheduled to give a press conference after the rate decision, and until then, investors are unlikely to get any clues from him.4
