The Federal Reserve is set to announce its interest rate decision on Wednesday with midterm elections less than a week away, and market expectations strongly favor holding rates steady [1]. The CME FedWatch tool shows a 90.6% probability of rates remaining at their current target range of 3.75% to 4%, up from 84.5% a week ago and 35.8% last month [1]. While policymakers say they avoid letting politics influence monetary policy decisions, they can be hesitant to hike or cut rates at meetings occurring ahead of elections [1].
Inflation remains a significant concern despite the expected rate hold. September consumer price index data showed headline CPI rising 0.6% on a monthly basis and 3.7% year-over-year, well above the Federal Reserve's 2% inflation target [1]. Heather Long, chief economist at Navy Federal Credit Union, noted that while the hotter-than-expected inflation data increased the prospect of an October rate hike, "it's a very high bar to increase in October, they would do it within a week of the election" [1]. Long explained that the data indicates 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" [1].
Looking ahead, the Fed is widely expected to resume its rate-hiking cycle in December. The CME FedWatch tool shows a 75.1% probability of a 25-basis-point interest rate hike at the mid-December meeting [1]. Long stated definitively: "The Federal Reserve will definitely hike interest rates again, probably in December" [1]. A key concern for policymakers is the broad-based nature of inflation pressures, with Long highlighting elevated prices across multiple categories including used cars, airfares, recreation costs, auto repair, and medical services [1]. Long suggested the inflation problem will likely require "a couple more hikes in 2027" and warned of "higher-for-longer borrowing costs and mortgage rates well above 7%" [1].
CONCLUSION
The Federal Reserve is expected to hold interest rates steady this week due to proximity to midterm elections, but market pricing indicates a high probability of a 25-basis-point hike in December as broad-based inflation remains stubbornly elevated above the Fed's 2% target. The persistence of inflation across multiple sectors suggests the Fed may need to continue tightening into 2027, keeping borrowing costs elevated for consumers and businesses.