The Federal Reserve is expected to keep interest rates where they are at its upcoming October meeting, even as rising energy costs complicate the inflation picture and add pressure to household budgets.
The consumer price index, a broad gauge of inflation, climbed again in September, lifting the annual rate to 3.7%. Surging oil prices tied to the U.S. war with Iran also pushed the September producer price index higher. On Friday, Brent crude traded at a five-month high before easing slightly.
Last month the Fed raised rates by 25 basis points to a range of 3.75% to 4%, its first increase since 2023. According to the CME Group's FedWatch tool, fed funds futures put the odds of another quarter-point hike at this week's meeting at under 10%. Nearly 75% of traders expect at least one increase by the end of the year.
Heather Long, chief economist at Navy Federal Credit Union, said inflation remains "the No. 1 problem in the U.S. economy" and appears to be spreading more broadly. "For consumers, it means really high borrowing costs for the foreseeable future," she said. She added that because the meeting comes right before an election, "they won't hike in October."
The meeting falls just days before the midterm elections and will be the central bank's last word on inflation before voters decide how much power each party holds in Washington. Research shows the Fed has mostly stayed on course in past election cycles. Mark Shore, director and economist at CME Group, noted that the four times the Fed raised rates near a midterm, in 1978, 1982, 2018 and 2022, were all linked to rising inflation.
Fed Chairman Kevin Warsh has voiced a commitment to returning inflation to the Fed's 2% target. In an Oct. 23 research note, Bank of America economist Aditya Bhave warned that "if the Fed holds, markets could question the Fed's inflation-fighting credibility."
The Fed's benchmark rate sets what banks charge one another for overnight loans and influences many consumer borrowing and savings rates. Shorter-term rates track the prime rate, typically 3 percentage points above the federal funds rate, while longer-term costs depend more on inflation expectations and the wider economy. Mark Zandi, chief economist at Moody's, said higher long-term rates are doing more harm to consumers because they have risen faster than short-term rates, weighing on refinancing, homebuying and vehicle sales. Higher short-term rates mainly raise costs on credit cards, consumer finance loans and home equity lines, he said.
Most credit cards carry variable rates tied closely to the Fed's benchmark, so APRs should stay near current levels if the Fed holds. LendingTree puts the average rate on a new card offer at 23.96%. Mortgage rates follow Treasury yields more than the Fed. With the 10-year Treasury yield near 5%, the average 30-year fixed mortgage rate is close to 7.4%, according to Mortgage News Daily.
Edmunds reports that car buyers facing high financing costs are taking larger loans and stretching repayment terms. Federal student loan rates stay fixed for the life of a loan, though new borrowers face higher rates this academic year based on May's 10-year Treasury note auction. One bright spot is savings: yields on high-yield savings accounts and other deposit products remain relatively attractive while rates stay elevated.
