Fed Policy: Warsh Holds Steady Amid Oil Shock

The Federal Reserve is poised to maintain its current stance on borrowing costs this week.

Chairman Kevin Warsh is expected to keep the key interest rate at 3.9% on Wednesday. The decision comes despite a sharp rise in consumer prices linked to the Iran conflict.

The central bank raised rates from 3.6% to 3.9% last month. That move marked the first increase in three years. Investors and economists viewed that hike as the start of a new push to lower inflation.

Inflation accelerated following that move. Consumer prices rose 3.7% in September compared to the previous year. That figure is far higher than the 2.4% rate recorded in February, just before the war began. Monthly data shows prices increased by 0.3% in both August and September. A separate measure, the personal consumption expenditures price index, is forecast to jump to 3.6% in September from 3.4% in August. Core prices are projected to rise to 3.1% from 3.0%.

Higher borrowing costs are already affecting households. The average 30-year mortgage rate hit 7.4% earlier this month. According to Oxford Economics, that increase has made home buying unaffordable for five million more Americans since January. The Fed’s September hike adds to that pressure on auto loans and credit card debt.

President Donald Trump criticized the central bank for the recent rate increase. He attributed the decision to the committee rather than Warsh, his appointee. Warsh now must justify holding rates steady in October after hiking in September.

The policy meeting concludes less than a week before midterm elections. Voters have expressed concern over the cost of gas, groceries, and clothing. Warsh will hold a news conference following the announcement. He is expected to discuss the goal of returning inflation to the 2% target more quickly.

The U.S. economy continues to grow at a healthy pace. Unemployment stands at 4.2%. Government data is due Thursday, with forecasts suggesting quarterly growth will reach 3% in the third quarter. That would be an increase from 2.2% in the previous quarter. The Bank of Canada meets Wednesday and is forecast to raise rates to 2.5%. The European Central Bank and the Bank of Japan are scheduled to meet Thursday and are expected to hold their rates steady.