Federal Reserve is likely to hold interest rates steady in October. Here's what that means for consumers

The Federal Reserve is expected to leave interest rates unchanged at its upcoming October meeting — even as higher energy costs complicate the inflation outlook and put additional pressure on household budgets.

The consumer price index, a broad measure of inflation, rose again in September, bringing the annual inflation rate up to 3.7%. Surging oil prices stemming from the U.S. war with Iran also helped drive September's producer price index higher. On Friday, Brent crude oil was trading at a five-month high before falling slightly.

The Fed raised rates by 25 basis points to a range of 3.75% to 4% last month, its first hike since 2023. But Fed funds futures last priced in less than a 10% chance the central bank will hike rates by another quarter point at its meeting this week, according to the CME Group's FedWatch tool. Nearly 75% expect at least one hike by year-end.

"Inflation is still the No. 1 problem in the U.S. economy, and there are a lot of signs it is getting more broad-based," said Heather Long, chief economist at Navy Federal Credit Union. "For consumers, it means really high borrowing costs for the foreseeable future."

However, "given that it's right before an election," she added, "they won't hike in October."

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The central bank's upcoming meeting comes just days before the midterm elections and marks the final word on the pace of inflation in the U.S. before voters head to the polls, which could impact how much power each political party has in Washington.

In previous election cycles, the Fed has mostly maintained its charted course, research shows. The four times the Fed raised rates near a midterm — 1978, 1982, 2018 and 2022 — were all tied to rising inflation, according to Mark Shore, director and economist at CME Group.

Fed Chairman Kevin Warsh has expressed a commitment to bringing inflation down to the Fed's 2% target. "If the Fed holds, markets could question the Fed's inflation-fighting credibility," said Bank of America economist Aditya Bhave in a research note on Oct. 23.

The Fed's benchmark interest rate determines what banks charge one another for overnight loans. That rate then influences a wide range of consumer borrowing and savings rates. However, while higher interest rates can help ease inflationary pressures, they also raise borrowing costs in the near term, adding to the affordability crunch many households already face.

Shorter-term rates are closely tied to the prime rate, which is typically 3 percentage points above the federal funds rate. Longer-term borrowing costs, meanwhile, are driven more by inflation expectations and broader economic conditions.

"Higher longer-term rates are doing more damage to consumer wallets, as they've risen more than short-term rates, and are weighing heavily on refinancing activity, homebuying and vehicle sales," said Mark Zandi, chief economist at Moody's. "Higher short-term rates also hurt, but mostly by raising rates on credit cards, consumer finance loans and home equity lines."

Most credit cards carry variable rates that move closely with the Fed's benchmark rate. As a result, if the Fed leaves rates unchanged, credit card APRs are likely to remain near current levels. The average interest rate on a new credit card offer is now 23.96%, according to LendingTree.

Mortgage rates, by contrast, are influenced more by Treasury yields and the economic outlook. The yield on the 10-year U.S. Treasury, which serves as a benchmark for many long-term loans, has been near 5%, helping keep the average rate on a 30-year fixed mortgage close to 7.4%, according to Mortgage News Daily.

Auto loan rates are shaped by several factors, including the Fed's benchmark rate. With financing costs still elevated, many car buyers are taking on larger loans and extending repayment terms to cope with affordability challenges, according to Edmunds.

Federal student loan rates are fixed for the life of the loan, but rates for new borrowers are already higher in the current academic year based on the results of the 10-year Treasury note auction held in May.

Savings rates tend to track changes in the federal funds rate, which is a rare upside to the higher-for-longer rate outlook. Because the Fed has kept rates elevated, savers continue to benefit from relatively attractive yields on high-yield savings accounts and other deposit products.

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