US Fed expected to hold rates as inflation, energy costs weigh ahead of midterms

The US Federal Reserve is widely expected to keep interest rates unchanged at its meeting next week, despite persistent inflation and market expectations of at least one more rate hike before the end of the year, according to analysts cited by news agency AFP.The Federal Open Market Committee (FOMC) will meet over two days, with its interest rate decision scheduled for 2 pm local time (1800 GMT) on Wednesday.At its September meeting, the Fed raised its benchmark federal funds rate for the first time in three years, taking the target range to 3.75%-4%. The central bank has struggled to bring inflation down to its long-term target of 2%, which it has missed for more than five years.The decision comes just days before the November 3 US midterm elections, in which Democrats are seeking to wrest control of both chambers of Congress from President Donald Trump's Republican Party.

Inflation pressures complicate Fed's rate decision

The Fed's preferred inflation gauge, the Personal Consumption Expenditures (PCE) price index, reached a pandemic-era peak of 7.2% in 2022 before a series of interest rate increases brought it down to around 2.2% by late 2024.

However, inflation subsequently rose again amid Trump's economic policies, including tariffs that disrupted global trade and the US war with Iran. The PCE index reached a three-year high of 3.9% in May.Since the US and Israel attacked Iran in late February, global energy prices have surged, with retaliatory actions by Tehran sharply restricting oil and gas supplies through the Gulf. Higher energy costs have also begun feeding into the prices of other goods and services, putting affordability at the forefront of concerns ahead of the midterm elections.The Fed faces the challenge of controlling inflation while supporting the labour market. Higher interest rates increase borrowing costs, potentially slowing economic activity and curbing price pressures, but they can also weigh on employment.The US economy has also been dealing with weakening consumer confidence and signs of stress in an otherwise resilient jobs market. The latest consumer confidence survey from the Conference Board was expected to show a further decline in October after confidence fell in September to its lowest level in more than a decade.

Former Fed official says economic data favour further hikes

Loretta Mester, a former president of the Federal Reserve Bank of Cleveland, told AFP that the timing of the meeting ahead of the elections would not influence policymakers' decision."The Fed doesn't take into account any kind of political issues in that FOMC room," she said. "It really is based on the economics."Mester argued that economic conditions supported further monetary tightening, pointing to a stable labour market and inflation remaining above the central bank's target."The data that's come in continue to show a stable labor market and continue to show inflation above target," she said, adding that there was no evidence of inflation moving towards the target."The economics would suggest then you need to continue raising rates."However, Mester said most policymakers appeared reluctant to move too quickly. She expected the Fed could hold rates steady in October and consider another increase at its next meeting in early December.Wendy Edelberg, a senior fellow at the Brookings Institution, also said that central bankers would prefer to avoid becoming part of the political debate ahead of the elections."It's unhelpful for everyone if the Fed gets wrapped up in all the political discourse right before an election," she said.Edelberg added that raising rates in December rather than October would have limited economic implications.She viewed a possible delay less as a concession to Trump, who has repeatedly called for lower interest rates, and more as a way for the Fed to avoid becoming a target of political criticism.

Trump's criticism of Fed independence

Trump has repeatedly criticised the Federal Reserve over interest rates, which he considers too high. However, he has so far refrained from directing similar criticism at Kevin Warsh, whom he appointed to succeed Jerome Powell as Fed chair.Since returning to power last year, Trump has mounted an unprecedented challenge to the central bank's independence. His administration launched a criminal investigation into Powell and attempted to remove Fed Governor Lisa Cook.The investigation into Powell was dropped to smooth the way for Warsh's confirmation by the Senate, while the legal battle over Cook's removal continued despite a Supreme Court decision nullifying an earlier attempt to dismiss her.Last week, Cook declined to attend a hearing in a White House investigation into mortgage fraud allegations, which she denies.Meanwhile, the Fed's rate decision will come during a busy week for US economic data.Investors and policymakers were also awaiting updates on inflation, consumer confidence and third-quarter economic growth, alongside earnings reports from major companies.