Federal Reserve Holds Interest Rates Steady, With Odds of a December Hike Near 80 Percent

The US Federal Reserve held interest rates steady on Wednesday, as the economy faces a monthslong surge of inflation ahead of the midterm elections. The Fed's benchmark interest rate currently stands between 3.75 percent and 4 percent.

The central bank raised interest rates by a quarter of a percentage point last month, in an effort to battle back price increases. That move marked the first rate increase in three years.

The current level marks a significant drop from a recent peak attained in 2023. It nevertheless stands well above the zero percent level established at the outset of the Covid-19 pandemic.

Last month's rate hike should help cool inflation by slowing the economy and eating away at demand, though such a policy move typically yields results only after a lag lasting several months.

Inflation rose to a four-month high in September as fuel prices climbed in response to unrest in the Middle East, according to the US Bureau of Labor Statistics (BLS). Prices increased 3.7 percent in September compared with a year earlier, putting the inflation rate more than a percentage point above the Fed's target of 2 percent, the data showed.

The jobs picture weakened in the same month. Employers added 29,000 jobs in September, a sharp slowdown from the 162,000 jobs added in August, the BLS said. The job gains came in well below economists' expectations.

Bank of America Global Research said in a memo to clients last week that the economic conditions pose a quandary for the Fed. If the Fed hikes, investors might worry about overtightening; if the Fed holds, markets could question the Fed's inflation-fighting credibility, the memo said.

Against that backdrop, markets are looking to the next meeting. The odds of a quarter-point rate hike at the Fed's next meeting in December are pegged at nearly 80 percent, according to CME Group's FedWatch Tool, a measure of market sentiment.

The rate decision may also thrust the central bank into a political maelstrom in the final sprint to election day. President Donald Trump has repeatedly criticized the Fed for raising interest rates across both of his terms in office, including a reprimand leveled soon after last month's increase, when he posted on social media hours after the announcement calling for interest rates for the United States to be lowered, and fast.

The Fed is an independent institution established by Congress. The central bank is typically insulated from political interference, but several past presidents, including Trump, have sought to influence its interest rate policy.

In a memo to clients before the rate announcement, Deutsche Bank Research said the upcoming midterms could factor into a decision to hold rates steady, though in its view the election would not be a primary consideration. The memo said that, all else equal, the Fed might prefer to stay out of the headlines for raising rates just ahead of a midterm election where affordability is the principal concern.

Inflation is a top issue among voters. Attention will therefore remain on Wednesday's decision and on which path the Fed takes at its December meeting in the final stretch of the election.