Fed to Hold Rates in October, but December Hike Looms Amid Inflation and Election Pressure

Key points

• The Federal Open Market Committee is expected to leave interest rates unchanged at its October 28 meeting, with less than a 10% chance of a hike, according to CME Group’s FedWatch tool.
• Nearly 75% of market participants expect at least one rate hike by the end of 2026, likely in December, as inflation remains a top concern.
• U.S. inflation rose to 3.7% in September, driven by surging oil prices from the U.S. war with Iran, which also pushed producer prices higher.
• The Fed’s inaction may raise questions about its credibility in fighting inflation, especially as consumer borrowing costs remain high and affordability pressures mount.
• Other central banks, including New Zealand and Canada, are expected to raise rates, while the ECB and Bank of Japan are likely to pause, reflecting a hawkish but measured global stance.

Background

The Fed raised rates by 25 basis points in September, its first hike since 2023, and has signaled that further increases are likely. The upcoming meeting comes just days before U.S. midterm elections, which could influence the Fed’s decision. In previous election cycles, the Fed has maintained its course, with rate hikes near midterms tied to rising inflation. The Fed’s benchmark rate influences consumer borrowing and savings rates, with higher rates easing inflation but raising borrowing costs. The 10-year U.S. Treasury yield has been near 5%, keeping mortgage rates close to 7.4%, while credit card APRs remain high at 23.96%.

How outlets are covering it

CNBC emphasizes the Fed’s likely hold in October and the potential for a December hike, highlighting the impact on consumer borrowing costs and the Fed’s credibility. Bloomberg Economics notes that the Fed, ECB, and Bank of Japan are likely to pause, but other central banks, including New Zealand and Canada, may raise rates. Bloomberg also highlights the risk of an AI-related market correction around the midterm elections, which could tighten financial conditions. Both sources agree that inflation remains a top concern, but differ in their emphasis on the Fed’s credibility versus the global central bank stance.

Why it matters

The Fed’s decision will influence consumer borrowing costs, including credit card APRs, mortgage rates, and auto loan rates. Higher rates can ease inflation but add to affordability pressures for households. The Fed’s inaction may raise questions about its credibility in fighting inflation, especially as inflation remains broad-based. The decision also comes just days before U.S. midterm elections, which could impact the Fed’s future policy decisions and the political landscape in Washington.

What to watch

The Fed’s October 28 meeting will likely result in a rate hold, but markets expect a hike in December. The ECB and Bank of Japan are also likely to pause, while New Zealand and Canada may raise rates. The Fed’s post-meeting press conference will be closely watched for signals on future policy, especially as inflation remains a top concern. The U.S. government will also release third-quarter GDP and inflation data, which could influence the Fed’s future decisions.