U.S. Fed likely to opt for a “hawkish hold” amid inflation rebound and midterm-election pressure

[Financial News] The U.S. Federal Reserve System (Fed) faces the challenge of resurgent inflation ahead of this week’s interest-rate decision. With the U.S. midterm elections just days away, markets widely expect the Fed to hold rates steady, but deteriorating inflation data are expected to fuel heated debate at the Federal Open Market Committee (FOMC) meeting on the 27th–28th.
On the 25th (local time), Yahoo Finance reported that experts expect the Fed to opt for a “hawkish hold”—keeping rates unchanged while delivering a strong hawkish message.
Alan Blinder, a Princeton University professor and former Fed vice chair, said, “Now is the ideal time to provide clear forward guidance on monetary policy, strongly signaling that ‘we will hold rates this time but are prepared to raise them in the future, and the next meeting could be the time.’”
Recently released economic indicators are sounding the alarm over the Fed’s efforts to cool inflation. The Consumer Price Index (CPI) rose 3.7% year over year in September, with the pace of increase accelerating. Core CPI, which excludes food and energy, also edged up to 2.6%, while wholesale prices surged by at least 6%. The core Personal Consumption Expenditures (PCE) price index, the inflation gauge most closely watched by the Fed and due to be released the day after the FOMC meeting, is also expected to top 3%.
Despite the concerns raised by these inflation indicators, the prevailing market view is that the Fed will hold rates at this meeting. Traders are currently pricing in a nearly 90% chance of a rate hold at the meeting and see about a 70% probability of a 0.25-percentage-point hike in December, the final meeting of the year. The U.S. benchmark interest rate currently stands at 3.75%–4%.
The fact that the midterm elections are just days away is also seen as a factor constraining the Fed’s actions. Harvard professor Ken Rogoff, a former economist at the International Monetary Fund (IMF), said, “The fundamentals point to raising rates, but with the election so near, the Fed will likely hold rates and limit itself to mentioning the possibility of one or two hikes in the near future.” Former Vice Chair Blinder also noted that the timing, just before the election, would make the Fed hesitant to raise rates.
Esther George, former president of the Federal Reserve Bank of Kansas City, acknowledged that a rate hike just before the election could lead to misperceptions, but argued that this should not be a decisive factor. George said, “That would not be consistent with the role of an independent central bank that forecasts and makes decisions based on data,” while stressing that “central-bank communication is more important than ever when the economic outlook is divided.”
The Fed is divided between moderates who say they need to examine more economic data and hawks calling for an immediate response.
Fed Chair Kevin Warsh did not directly endorse or push back against dovish signals from Vice Chair Philip Jefferson or New York Fed President John Williams, but noted that economic conditions since the September meeting had “generally been in line with the Fed’s expectations.” Chicago Fed President Austan Goolsbee likewise said, “September’s inflation increase is disappointing, but I want to wait for more data before raising rates further.”
Hawkish policymakers, including Federal Reserve Bank of Cleveland President Beth Hammack, argue that rates should be raised even slightly now to prevent inflationary pressures from spreading broadly. They fear that a long delay could lead to a repeat of something like the sharp rate hikes of 2022.
Blinder responded, “A few recent indicators make a case for raising rates, but in the broader picture, this is a situation where we can pause for now,” adding, “Although inflation has become entrenched, the overall trend over the past three to four years has remained flat, so an immediate hike is not urgent.”
Two FOMC meetings remain this year: on the 27th–28th and December 8–9.
[email protected] Yoon Jae-joon Reporter