Warsh Fed to hold rates steady as midterm elections loom

With the U.S. midterm elections approaching next week, the Federal Reserve is expected to leave its benchmark interest rate unchanged at its policy meeting concluding Wednesday. This decision comes despite a recent acceleration in inflation driven by the Iran war and its impact on global energy markets.

The Fed, under Chairman Kevin Warsh, aims to bring inflation back to its 2% target. To achieve this, the central bank raised its key rate from 3.6% to 3.9% in September, marking the first increase in three years. Many investors viewed that move as the start of a renewed campaign to cool the economy. However, Warsh faces pressure from both sides. President Donald Trump criticized the September hike, though he largely blamed the committee rather than Warsh, whom he appointed. Additionally, inflationary forces such as rapid artificial intelligence infrastructure buildouts and high energy prices may not respond easily to higher borrowing costs.

Higher rates are already affecting households. The average 30-year mortgage rate hit a three-year high of 7.4% earlier this month before dipping slightly. According to consulting firm Oxford Economics, rising mortgage costs have made homebuying unaffordable for 5 million more Americans since the start of the year. These costs add to a broader sense that essentials like housing and vehicles are becoming pricier.

Inflation data shows the problem persists. Consumer prices rose 3.7% year over year in September, a sharp jump from the 2.4% rate recorded in February before the conflict with Iran began. On a monthly basis, the consumer price index increased by 0.3% in both August and September. A separate metric, the personal consumption expenditures price index, is forecast to jump to 3.6% in September, up from 3.4% in August. Core prices, which exclude food and energy, are expected to rise to 3.1%.

Aditya Bhave, head of U.S. economics at Bank of America, warned that policymakers have become too comfortable with inflation above the target level. He noted that elevated oil and gas prices will likely keep inflation high for several months. Furthermore, rising diesel costs will increase shipping prices for most goods, spreading inflation across the economy. "Unless the Fed takes this problem more seriously and stops essentially making excuses about inflation, I think we're not going to get back to 2% until the next recession," Bhave said.

Warsh is scheduled to hold a news conference following the rate decision. He is expected to keep the session short, similar to the 30-minute briefing last month, which was shorter than the typical 45-minute sessions held by his predecessor, Jerome Powell. Investors will listen closely for clues about the Fed's next move, with many expecting a rate increase in December.

The Fed is weighing its decision against a resilient economic backdrop. Unemployment remains low at 4.2%, and the government expects economic growth for the third quarter to reach 3%, up from 2.2% in the previous quarter. Many economists argue that this strong growth suggests the economy can withstand higher rates to combat inflation. The Fed's meeting coincides with global central bank actions, as the Bank of Canada is expected to raise its rate to 2.5% on Wednesday, while the European Central Bank and the Bank of Japan are expected to hold rates steady on Thursday.