The Fed is expected to keep interest rates on hold at its next meeting in October, even as rising energy costs complicate the inflation outlook and put additional pressure on household budgets.
The consumer price index, a broad measure of inflation, rose again in September, raising annual inflation to 3.7%. Rising oil prices due to the war between the US and Iran also contributed to the rise in the producer price index in September. Brent crude oil traded at a five-month high on Friday, but has since fallen slightly.
Last month, the Fed raised interest rates by 25 basis points to a range of 3.75% to 4%, marking the first rate hike since 2023. But according to CME Group’s FedWatch tool, federal funds futures are finally pricing in the possibility that the Fed will raise rates another quarter of a point at this week’s meeting. Nearly 75% expect at least one rate hike by the end of the year.
“Inflation remains the biggest problem in the U.S. economy, and there are many signs that it will spread more broadly,” said Heather Long, chief economist at Navy Federal Credit Union. “For consumers, this means significantly higher borrowing costs for the foreseeable future.”
However, he added, “Given that it’s just before the election, we won’t be raising interest rates in October.”
The central bank’s next meeting will be held just days before midterm elections and will mark its final decision on the pace of U.S. inflation before voters head to the polls, which could affect each party’s influence in Washington.
Research shows that the Fed has largely stayed on course in past election cycles. Mark Schorr, director and economist at CME Group, said each of the Fed’s four near-term interims (1978, 1982, 2018 and 2022) was tied to higher inflation.
Federal Reserve Chairman Kevin Warsh has vowed to bring inflation down to the Fed’s goal of 2%. “If the Fed holds, markets could question the credibility of the Fed’s inflation policy,” Bank of America economist Aditya Bhave said in an Oct. 23 research note.
How the Fed affects your money
The Fed’s base rate determines the amount banks charge each other for overnight loans. This rate has a wide-ranging impact on consumer borrowing and savings rates. But while higher interest rates help ease inflationary pressures, they also increase borrowing costs in the short term, exacerbating the housing affordability squeeze many households are already facing.
Short-term interest rates are closely related to the prime rate, which is typically 3 percentage points above the federal funds rate. Long-term borrowing costs, on the other hand, are largely determined by inflation expectations and broader economic conditions.
“Rising long-term interest rates are hurting consumers’ wallets more than short-term rates, weighing heavily on refinance activity, home purchases and auto sales,” said Mark Zandi, chief economist at Moody’s. “Rising short-term interest rates will also hurt, primarily due to higher interest rates on credit cards, consumer finance loans, and home loans.”
Most credit cards have variable interest rates that are approximately the same as the Federal Reserve’s benchmark rate. As a result, if the Fed leaves interest rates unchanged, credit card APRs are likely to remain around current levels. According to LendingTree, the average interest rate for new credit cards is currently 23.96%.
In contrast, mortgage rates are more influenced by Treasury yields and the economic outlook. The 10-year Treasury note, the benchmark for many long-term loans, is yielding nearly 5%, which has helped keep the average interest rate on a 30-year fixed mortgage near 7.4%, according to Mortgage News Daily.
Auto loan interest rates are determined by several factors, including the Federal Reserve’s benchmark interest rate. With financing costs still rising, many car buyers are taking out larger loans and extending repayment terms to address affordability challenges, Edmunds said.
Federal student loan interest rates are fixed for the life of the loan, but interest rates for new borrowers are already higher this 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, a rare upside to the long-term interest rate outlook. Because the Fed keeps interest rates high, savers continue to benefit from relatively attractive yields on high-yield savings accounts and other savings products.
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