WASHINGTON, Oct 28 (Reuters) – The Federal Reserve is expected to hold interest rates steady on Wednesday, less than a week ahead of critical US midterm elections centered on the cost of living, as central bank policymakers wait to see if inflation moderates or stays strong enough to warrant more hikes in borrowing costs.
Fed officials ahead of this week’s two-day policy meeting had signaled the central bank could be patient after raising rates by a quarter of a percentage point last month.
Maintaining the Fed’s benchmark interest rate in the current 3.75%-4.00% range also would move the discussion beyond the November 3 midterm elections that will determine whether President Donald Trump’s Republican Party retains control of Congress over the final two years of his term or cedes one or both legislative chambers to the Democrats.
There is about a 90% probability that the Fed will hold rates steady when it issues its policy decision at 2 p.m. EDT (1800 GMT), according to CME Group’s FedWatch tool.
Financial markets’ focus, instead, has shifted to the likely pace and extent of future rate increases that investors see as inevitable given the strength of inflation. Economists and many Fed policymakers now see prices driven higher not just by the lingering energy cost shock from Trump’s decision to attack Iran and the holdover effects of his tariffs, but by strong demand from the artificial intelligence industry and healthy consumer spending.
Fed officials see demand-driven inflation as being more under their control, and concerns that price increases are broadening across the economy could lead some policymakers to dissent in favor of a rate hike that they feel is needed to keep inflation from accelerating.
“Today, the question is not so much about whether the Fed will hike again, but about how many more hikes are to follow,” Dario Perkins, TS Lombard’s managing director for global macro, wrote in an analysis that suggested the Fed may be forced into a series of hikes “if the AI bubble doesn’t burst.”
Given Fed Chairman Kevin Warsh’s promise in an August 28 speech to return inflation to 2% “at sufficient speed,” Perkins said the central bank “will need to keep hiking until its target is in sight.”
Right now it is not, a fact Warsh will need to reconcile with any decision to hold rates steady. While the central bank’s policy statement, which has shrunk considerably since the new Fed chief took over in late May, is not expected to provide much of an explanation, Warsh is likely to face questions about why such a pause was considered appropriate when he participates in a press conference scheduled to start at 2:30 p.m. EDT.
PERSISTENT INFLATION
The Fed’s 2% inflation target is measured by the Personal Consumption Expenditures Price Index. Initial estimates show the headline reading for that index, as well as related measures stripping out some volatile commodity and non-market prices, rose in September and remain lodged at 3% or higher on an annualized basis — with little progress seen in recent months.
The PCE report for September will be released on Thursday, a day after the policy meeting concludes, but enough of the component data is in hand for policymakers to have a firm estimate of the numbers.
Since Warsh took the helm at the Fed, some of the dynamics policymakers said might help lower inflation — like an end to the US-Israeli war with Iran and productivity improvements stemming from AI — have yet to materialize.
After a summer lull that helped lower month-to-month inflation in June and July, the global benchmark oil price has since surged to around $114 a barrel, rising about 20% since the start of September. Prices for diesel fuel — a critical input for numerous industries including agriculture, construction and transportation — are near record highs and have been a force behind the widening of inflation.
The AI boom, meanwhile, has come to be seen across the Fed as a short-term driver of inflation regardless of its potential to make the economy more productive over the medium or long term.
The breadth and persistence of inflation will be central as Fed officials debate the course of policy, even if they agree to leave rates on hold for now, Derek Tang, an economist at Monetary Policy Analytics, wrote ahead of the rate-setting Federal Open Market Committee’s meeting this week. Tang’s firm now sees the Fed approving three more quarter-percentage-point rate increases in its coming meetings, in line with market expectations of quarterly hikes from now through June 2027.
To avoid seeming dovish after a pause in the wake of stronger inflation data, “Warsh will likely seek to couch the October skip against a wide backdrop of an FOMC still set on proving its mettle” in fighting inflation, Tang wrote.
“Stopping the spread of inflation from idiosyncratic supply shocks to demand more broadly is top of mind for even the center of the Committee,” which has grown more anxious that demand inflation is taking on a life of its own, he said.
(Reporting by Howard Schneider;Editing by Dan Burns and Paul Simao)











Comments