FOMC meets for final time before midterm elections
Navy Federal Credit Union chief economist Heather Long discusses the <a s upcoming interest rate decisions.
The interest rates this Wednesday, with midterm elections occurring in less than a week.
Officials at the Fed maintain that they do not allow political considerations to dictate their monetary policy, and they often show reluctance to adjust interest rates during meetings held immediately preceding an election.
Inflation has remained persistently high, and consumer price index (CPI) data for September revealed that price growth exceeded expectations, with headline CPI increasing 0.6% monthly and 3.7% over the previous year. The latter figure remains significantly higher than the central bank’s 2% target.
Heather Long, chief economist at Navy Federal Credit Union, noted in an interview that while the September inflation figures were hotter than anticipated and raised the possibility of an October rate hike, the Fed is likely to wait to “hike again in December.”
CONSUMER INFLATION ROSE FASTER THAN EXPECTED IN SEPTEMBER, CPI REPORT SHOWS
Federal Reserve leadership and policymakers are expected to maintain current rates this week.
“This hotter than expected inflation data did increase the chance of an October rate hike, but it’s a very high bar to increase in October, they would do it within a week of the election. I know they like to say that they’re not political, but it’s a high bar for October,” she explained.
“Right now, this data indicates that the Fed needs to act again, but it’s not a five-alarm fire. They don’t have to act immediately, they could wait until December.”
“The reality is, gas prices have come down a little bit since the September highs, so we would expect the October data – you know, it won’t be great, but it could be a little bit cooler than what we’re seeing today. And the Fed has a reasonable case to say, we’re probably still gonna hike, but let’s wait a few more weeks and see just how broad-based this problem really is,” Long said.
FEDERAL RESERVE HIKES INTEREST RATES FOR FIRST TIME SINCE 2023 AMID STUBBORN INFLATION
Market participants anticipate that the Fed will keep rates unchanged this week, as the CME FedWatch tool indicates a 90.6% probability that rates will stay within the current 3.75% to 4% target range—an increase from 84.5% last week and 35.8% a month ago.
Regarding the mid-December meeting, the tool reflects a 75.1% likelihood of a 25-basis-point rate increase, which could signal the restart of the hiking cycle if inflation stays elevated.
WHY THE FED ISN’T READY TO DECLARE VICTORY ON INFLATION
Inflation rose faster than expected in September and remains well above the central bank’s 2% target.
“The Federal Reserve will definitely hike interest rates again, probably in December,” Long said. “The big question is how many more times do they have to hike after that? And what was scary in this latest inflation data for September is to see so many areas of hot inflation: to see used car prices, airfares, recreation costs, auto repair costs, buying a used car, medical costs.”
“The story really is starting to take shape that it’s probably going to take a couple more hikes in 2027, and this higher-for-longer borrowing costs and mortgage rates well above 7% is going to stick around for at least a year, maybe longer,” Long said.
The CME FedWatch tool shows that the market expects multiple rate increases by March, with a 46.5% probability that rates will be 50 basis points higher than current levels, reaching a range of 4.25% to 4.5%.
