Fed Expected to Hold Rates Wednesday After September Inflation Hit 3.7%, Six Days Before Midterms

The Federal Reserve's two-day meeting opens Tuesday, Oct. 27, and analysts widely expect Chair Kevin Warsh and the Federal Open Market Committee to hold interest rates steady when they announce the decision at 2 pm ET on Wednesday, Oct. 28. That would leave the federal funds target at 3.75% to 4%, the level set in September when the Fed raised rates for the first time in three years.

The pause would come against the hottest inflation report in months. And voters get their say six days later.

What the September data showed

The Labor Department said the consumer price index rose 3.7% in September from a year earlier, up from 3.4% in August. Prices rose 0.6% on the month, the biggest monthly gain in five months. Both numbers came in above economists' expectations.

Core prices, which exclude food and energy, rose 2.6% year over year, up from 2.4%. On the month, core rose 0.3%.

Gasoline did most of the damage. The Bureau of Labor Statistics said gas prices jumped 9.1% in September, accounting for more than half of the monthly increase, and were up 34.2% from a year earlier. AAA put the national average at $4.33 a gallon, with diesel at $6.29. GasBuddy's Patrick De Haan said 2026 has now logged 158 days with gas above $4, more than any year on record.

Shelter costs rose 0.4%. Food prices were flat overall, with grocery prices down 0.1%.

Morning Brew noted that inflation has now outpaced wage growth for a sixth straight month.

Where the pressure is coming from

Energy is the main driver. Since the U.S. and Israel attacked Iran in late February, Tehran's retaliation has sharply curtailed oil and gas supplies through the Gulf. The Fed's preferred gauge, the PCE price index, hit a three-year high of 3.9% in May, after falling to about 2.2% by late 2024.

Trump's tariffs and the AI buildout are also in the mix. Computer and peripheral prices are up 9.7% from a year ago, and a Goldman Sachs report this month estimated the data-center and chip boom accounts for nearly half a percentage point of annual inflation.

The Fed has missed its 2% target for more than five years.

Hike now, or wait for December

The central bank cannot drill for oil, a point Chicago Fed President Austan Goolsbee has made. Supply-driven inflation may be easier to bring down than the demand-driven surge after the pandemic, he said last month, but "it won't be painless either." Much of the current inflation stems from supply shocks that higher rates cannot fix directly.

Some economists argue the Fed should keep tightening. Mester, the former Cleveland Fed president, told AFP that the data show a stable labor market and inflation above target with no sign of heading back down. "The economics would suggest then you need to continue raising rates," she said. Still, she expects most policymakers to hold this time and move at the early-December meeting.

Other Fed officials have said the bank can afford to wait, and officials have penciled in just one more hike this year. Morning Brew, citing the CME's FedWatch tool, said the odds of a quarter-point hike on Oct. 28 rose from 22% to 35% after the CPI release on Oct. 14. Analysts quoted since then expect a hold.

Beth Ann Bovino, chief economist at US Bank, framed the tradeoff this way: "Inflation is the disease. And now the Fed comes with a cure: higher interest rates. I don't know which is more painful because they both hurt." She said households relying on paychecks have less cushion than those with large stock holdings.

The politics

The timing is awkward. Democrats are trying to take both chambers of Congress from Trump's Republicans on Nov. 3, and prices are a central issue. An AP-NORC poll found 17% of U.S. adults approve of Trump's handling of the cost of living, and 26% approve of his handling of the economy, a new low in that survey.

Mester says politics will not enter the room. "The Fed doesn't take into account any kind of political issues in that FOMC room," she said. Wendy Edelberg of the Brookings Institution said central bankers would rather not be dragged into the political debate before the vote.

Trump spent years attacking Warsh's predecessor, Jerome Powell, over rates he considered too high. He has so far not targeted Warsh, the man he appointed.

Neither party has a quick fix. House Democratic Leader Hakeem Jeffries promises an "affordability agenda" to "drive down the high cost of living in every possible area." The Washington Post's analysis notes that the main inflation drivers are the Iran war, the AI boom and Trump's trade policies, and that Democrats would have little chance of ending the war or the tariffs over Trump's opposition even if they win both chambers.

What to watch

The Fed's statement and Warsh's press conference Wednesday will show whether officials signal a December hike. The next FOMC meeting is in early December, and it will be the first after voters have decided who controls Congress.