Fed likely to hold rates steady ahead of midterms

The Federal Reserve is expected to hold its key interest rate steady on Wednesday.

The decision caps the fourth meeting of Chairman Kevin Warsh’s tenure, which has drawn scrutiny over his independence from President Donald Trump. The meeting concludes just six days before the midterm elections, a period shaped by rising gas and grocery prices.

Markets currently see little chance of a rate increase. Earlier this month, the average 30-year mortgage rate hit a three-year high of 7.4% before slipping to 7.32%. Oxford Economics estimates these increases have pushed home buying out of reach for 5 million households. Investors had previously predicted a quarter-point hike to 4.1% after hot inflation data, but that expectation has faded.

Philip Jefferson, vice chair of the Fed's board, said his colleagues would need to form their own judgment, which might take more time. Joseph LaVorgna, chief economist at SMBC Americas, noted that the central bank likely wants to avoid action so close to the election. He stated that the Fed does not want to poke the White House in the eye six days before the vote.

The meeting also raises questions about Warsh’s stance on forward guidance. He has criticized clear signals from previous chairs, arguing they limit the Fed’s flexibility. However, recent speeches by top officials sounded like such guidance. Aditya Bhave, head of U.S. economics research at Bank of America, suggested Warsh may have endorsed these messages, challenging his stated preference for ambiguity.

Warsh’s independence remains a point of focus. In September, he voted to raise rates despite Trump’s preference for cuts, a move that eased some market concerns. James Knightley, chief international economist at ING, said markets have been encouraged by the chairman’s actions. However, Trump has renewed efforts to remove Fed governor Lisa Cook, a move blocked by the Supreme Court in June. Trump also told reporters he had called Warsh before the last meeting, a fact Warsh declined to confirm publicly.

Two or three dissenting votes are possible among the 12 officials who set rates. Beth Hammack of the Cleveland Fed and Lorie Logan of the Dallas Fed are the most likely to advocate for a hike. Both have argued the current rate is not high enough to cool inflation, which has exceeded the Fed's 2% target for nearly six years.