The Federal Reserve enters this week’s interest rate decision confronting hotter inflation and an awkward political calendar. Markets widely expect officials to leave rates unchanged just days before the midterm elections, although the meeting remains consequential because additional increases are still under consideration.
Alan Blinder, a former Fed vice chair and a Princeton University economics professor, expects what he called a “hawkish pause.” While Fed Chairman Kevin Warsh does not favor telegraphing the central bank’s next move, Blinder argued that the current moment demands clarity.
“This is a perfect time for clear forward guidance that doesn’t quite say, but strongly hints, we’re pausing now, but we stand ready to raise again and even give a hint that the next meeting might be the next interest rate hike.”
September’s inflation reports complicated the Fed’s decision. The Consumer Price Index accelerated to 3.7% from a year earlier, while core CPI, which excludes food and energy, edged up to 2.6%.
Wholesale prices increased more than 6%. The core Personal Consumption Expenditures index, the Fed’s preferred inflation gauge, is projected to exceed 3%.
In his final remarks before this week’s policy meeting, Warsh neither endorsed nor rejected signals from Fed Vice Chair Philip Jefferson and New York Fed president John Williams that they would prefer to review more data before considering another increase. Warsh said the world had “broadly conformed to our expectations” since September’s meeting.
The Fed raised rates in September for the first time in more than three years. Minutes from that gathering said most participants judged that another increase would probably be appropriate by the end of the year.
Ken Rogoff, a Harvard University professor and former chief economist of the International Monetary Fund, told Yahoo Finance that he expects officials to hold rates steady because the midterm elections are less than a week later. He nevertheless believes economic fundamentals support another increase.
“The fundamentals call for raising the rate,” Rogoff said. “If you didn’t have an election, they should hike … But they are going to hold rates steady and talk about how they’re probably going to increase it once or twice at least in the near future.”
Blinder also sees the election’s proximity as part of the calculation, although not the only consideration. “When it’s that close to an election there’s something to be said for keeping your head down,” he said, describing the timing as a “minus” in the case for raising rates.
“The Fed can then move pretty quickly later,” Blinder said. That view would allow officials to pause without signaling that the tightening process has ended.
Esther George, former head of the Kansas City Federal Reserve, acknowledged the optics of increasing rates immediately before an election but disputed that politics should factor into the decision. “It certainly wouldn’t be consistent with an independent central bank that is looking at the data and making a judgment about a forecast.”
George also does not expect a rate hike, but she believes officials must explain how they view current economic conditions. “Communication is more important than ever when you get into times like this where you see the economy pushing and pulling in different directions,” she said.
The center of the Fed’s interest rate setting committee has signaled a desire to gather more evidence while avoiding an unnecessary slowdown in economic growth. Chicago Fed president Austan Goolsbee told Yahoo Finance that September’s hotter than expected consumer inflation was “discouraging,” but he wants additional data before supporting another increase.
Goolsbee said core inflation remaining at its current level would be neither “acceptable” nor “compatible with the Fed target, and our policy needs to address that.” Other officials, including Cleveland Fed President Beth Hammack, would prefer small increases now to contain what they regard as broadening inflation.
That hawkish camp worries that waiting too long could eventually require more drastic action, similar to the aggressive tightening campaign mounted in 2022. George, meanwhile, said the reasoning behind a pause remains unclear.
“I haven’t heard clearly, ‘here’s why waiting would be appropriate,’” George said. She questioned whether one additional data point could materially change the inflation trend or determine whether persistence had become unacceptable.
Blinder conceded that recent reports could justify another rate increase, but he said the broader picture permits a pause. He does not see an urgent need to raise rates because the latest CPI increase has not established a clear overall trend toward higher inflation.
“What there is, is inflation that’s stubbornly too high,” Blinder said. “The trend in inflation looks to me quite flat. Yes, it goes up sometimes, yes, it comes down sometimes, but it’s pretty flat over the past three or four years on net despite monthly ticks up or down.”
The Fed’s benchmark rate currently stands between 3.75% and 4%. Traders assign nearly 90% odds to a hold next week, while pricing 70% odds of a quarter point increase in December.