The Federal Reserve is expected to keep its key interest rate unchanged at its upcoming meeting, but investors will closely scrutinize the central bank’s statement for hints about future moves and inflation trends. The Oct. 27-28 meeting marks the fourth under Chairman Kevin Warsh, whose tenure has been scrutinized for potential influence from President Donald Trump, who appointed him earlier this year. The meeting also comes just six days before midterm elections, with affordability concerns at the forefront due to soaring gas prices, elevated grocery costs, and high mortgage rates.
Despite inflation running hotter than expected last month, the likelihood of a rate hike at this meeting has diminished. Investors now see almost no chance of an increase, with the current rate at about 3.9%. Philip Jefferson, vice chair of the Fed’s board of governors, suggested that the Fed needs more time to assess the economic data before making a decision. Joseph LaVorgna, chief economist at SMBC Americas, noted that the Fed is unlikely to act just before the election, avoiding any perceived interference with the White House.
Warsh’s approach to forward guidance has also been a focal point. He has expressed disdain for providing clear signals about future moves, preferring flexibility. However, recent speeches by top officials have raised questions about whether this stance is still in place. Aditya Bhave, head of U.S. economics research at Bank of America, suggested that Warsh’s credibility on this issue could be at stake if he does not align with the messages from other officials.
Concerns about Warsh’s independence from Trump persist, particularly after the chairman defied the president’s preferences by raising rates in September. Trump has renewed efforts to remove Fed governor Lisa Cook, which would open another slot for him to fill. The Supreme Court previously blocked an earlier attempt to remove her. With the scope of Warsh’s communications with Trump unclear, some economists remain skeptical about the chairman’s independence.
Inflation remains a key concern, with diesel fuel reaching an all-time high of $6.53 in late September before slightly falling to $6.35. High diesel costs could raise shipping prices for goods like groceries and cars, potentially spreading inflation further. Bhave noted that inflation has not been at the Fed’s 2% target for a single calendar quarter since the final three months of 2020.