Although the inflation rate has increased to 3.7% and people in America have been facing problems due to high living costs, the Federal Reserve is likely to maintain the same interest rates this week.
This is because of the price hikes that have resulted from the war that the United States is waging against Iran, making energy more expensive.
However, the central bank only hiked interest rates last month, and further hikes may be placing undue strain on an economy in which people are already feeling the brunt of high interest rates.
Investors watching the CME Group’s FedWatch tool now see just less than a 10% probability of another quarter-point hike in October.
This is a huge contrast to how things were in September, when officials raised the benchmark interest rate to 3.75%-4%, the first such increase since 2023.
The Fed has several reasons to wait before raising rates again
The latest inflation numbers aren’t exactly comforting. September’s consumer price index increased 3.7% from a year earlier, putting inflation considerably above the Fed’s 2% target.
Oil has been one of the biggest challenges. The Brent crude hit its highest level in five months on Friday before reversing some of its gains. Higher oil prices have also been responsible for the increase in September’s producer price index, which reflects the prices businesses get for their goods.
Economists expected that the September inflation reading would be 3.6%, up from 3.4% in August, before its publication on Thursday. They cited higher prices for flights, rents, computers, along with gasoline, as reasons.
However, there is something different with the job market. The hourly wage growth has been lower than inflation for six straight months. This is important as the fast-rising wages could prompt businesses to increase prices as well.
Right now, September’s Fed meeting minutes also showed that several officials considered their previous rate increase a precaution against inflation becoming harder to control.
If the Middle Eastern conflict subsides and the supply of energy sources is stable, some of that pricing pressure could evaporate even without further monetary policy tightening.
And there is Wall Street.
Bond yields backed off last week at the tail end of a selloff in equities over worries about the demand for artificial intelligence and whether it will match up with the huge investment made in the sector.
Fed Chairman Kevin Warsh has said before that tight financial conditions may be enough to slow the economy, eliminating the necessity of higher interest rates.
However, investors are not counting out an additional hike. Almost 75% expect another hike before 2026.
This week’s decision comes shortly before the US midterm elections, which will determine how political power is divided in Washington.
Borrowers could face expensive loans for longer while savers benefit
For those who expect cheap credit soon, any break may mean little.
Credit card rates are especially vulnerable to movements in the Federal Reserve’s key interest rate because they have floating interest rates.
According to LendingTree, the average annual percentage rate of new credit card offers hovers at 23.96%.
However, mortgages are an exception.
They depend mostly on Treasury bond yields and the outlook on economic growth.
When the yield of 10-year US Treasury bonds stays at 5%, the average 30-year fixed mortgage rate is 7.4%, according to Mortgage News Daily.
This raises the cost of buying real estate significantly, especially in cases where most of the purchase is financed by loans.
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