Despite Trump pressure, Fed likely to hold interest rates steady ahead of US midterms

The US Federal Reserve is expected to maintain interest rates unchanged during its upcoming meeting, despite high inflation rates and markets forecasting at least one increase before the year's end. The Federal Open Market Committee (FOMC) will convene for two days and reveal their decision at 2:00 pm local time (18:00 GMT) on Wednesday.

Since 2016, the Fed has failed to meet its inflation target of 2 percent, and after raising the key federal funds rate in September for the first time in three years, the range expanded from 3.75 percent to 4.0 percent. This meeting takes place in the weeks leading up to the crucial U.S. midterm elections on November 3, where the Democratic Party aims to seize control of both chambers of Congress from President Donald Trump's Republican party.

While Trump has often criticized the Federal Reserve Chair Jerome Powell over the high interest rates, he has largely stayed silent on his successor, Kevin Warsh. The Fed's chosen measure for inflation, the Personal Consumption Expenditures (PCE) price index, peaked at 7.2 percent in 2022, but fell to around 2.2 percent by late 2024 due to consecutive interest rate hikes.

The high-profile policies of Trump, such as disrupting the global trade system through tariffs and waging war on Iran, further increased inflation, which reached a three-year peak of 3.9 percent in May. James Mester, a former regional head of the Cleveland Fed, stated that the election timing would not influence the Fed's decision, as they solely focus on economic factors.

Mester argued that the data suggests stable labor market conditions and persistent inflation above the target, urging policymakers to continue raising rates. However, she believed most central bankers wanted to avoid rapid moves and might hold rates steady until the next meeting in early December. Wendy Edelberg, a Brookings Institution senior fellow, believes central bankers would prefer to stay out of the political debate ahead of the elections, stating that it would be unhelpful for everyone if the Fed gets entangled in political discourse.

Edelberg added that there wouldn't be significant economic repercussions if rates were raised in December rather than October, suggesting such a decision was more about avoiding potential political targets rather than a direct response to Trump's demands. President Trump has launched an aggressive campaign against the Federal Reserve's independence, initiating a criminal probe against Powell and attempting to remove Fed Governor Lisa Cook.

Although the probe against Powell was dropped to facilitate Warsh's Senate confirmation, the effort to remove Cook persists, despite a Supreme Court decision nullifying an earlier attempt. Cook declined to attend a hearing in the White House's investigation into mortgage fraud allegations she denies.