Fed Expected to Hold Rates Steady Despite Rising Inflation, but Signals Could Turn Hawkish

The Federal Reserve heads into its interest-rate decision this week facing hotter inflation, keeping the meeting in focus even as markets widely expect the central bank to hold rates steady just days before the US midterm elections. Jennifer Schonberger reported on the outlook for Yahoo Finance.

The Federal Reserve is expected to hold interest rates steady as rising inflation keeps the possibility of further rate hikes on the table. [Photo: Federal Reserve Flickr]

Alan Blinder, a former Federal Reserve vice chair and Princeton University economics professor, expects what he calls a “hawkish pause.”

Although Fed Chair Kevin Warsh does not favor telegraphing the central bank’s next move, Blinder said the current situation calls for clearer communication.

“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,” Blinder said.

Inflation accelerated in September, with the Consumer Price Index (CPI) rising 3.7% from a year earlier.

Core CPI, which excludes food and energy, increased 2.6% year over year.

Producer prices also rose sharply, while the Federal Reserve’s preferred inflation measure—the core Personal Consumption Expenditures (PCE) price index—was projected to exceed 3%.

Some observers believe Warsh’s recent remarks were consistent with comments from Fed Vice Chair Philip Jefferson and New York Fed President John Williams, who have indicated that policymakers want more time to assess economic data before deciding whether additional rate increases are warranted.

Warsh neither endorsed nor rejected those signals.

He said, however, that economic developments had “broadly conformed to our expectations” since the Fed’s September meeting.

Minutes from that meeting showed that most participants believed another rate increase would likely be appropriate before the end of the year.

Ken Rogoff, a Harvard University professor and former chief economist of the International Monetary Fund, told Yahoo Finance he expected the Fed to hold rates steady at its next meeting because it falls less than a week before the midterm elections.

“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.”