Federal Reserve expected to hold interest rates steady in last decision before midterm elections

The Federal Reserve is set to announce its latest interest rate decision on Wednesday with the midterm elections less than a week away.

Policymakers at the Fed say they avoid letting politics influence their monetary policy moves, and can be hesitant to hike or cut interest rates at meetings that occur ahead of the election.

Inflation has remained stubbornly high and the September consumer price index (CPI) data showed inflation rose faster than expected, with headline CPI rising 0.6% on a monthly basis and 3.7% from a year ago. The latter figure is well above the central bank's 2% inflation target.

Heather Long, chief economist at Navy Federal Credit Union, told FOX Business in an interview that while the September inflation data was hotter than expected and raised the prospects of an October rate hike, the Fed is likely to wait to "hike again in December."

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Federal Reserve Chair Kevin Warsh and policymakers are expected to hold rates steady this week. (Daniel Heuer/Bloomberg via Getty Images)

"This hotter than expected inflation data did increase the chance of an October rate hike, but it's a very high bar to increase in October, they would do it within a week of the election. I know they like to say that they're not political, but it's a high bar for October," she explained.

"Right now, this data indicates that the Fed needs to act again, but it's not a five-alarm fire. They don't have to act immediately, they could wait until December."

"The reality is, gas prices have come down a little bit since the September highs, so we would expect the October data – you know, it won't be great, but it could be a little bit cooler than what we're seeing today. And the Fed has a reasonable case to say, we're probably still gonna hike, but let's wait a few more weeks and see just how broad-based this problem really is," Long said.

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The market expects the Fed to hold rates steady this week, with the CME FedWatch tool showing a 90.6% probability of rates remaining at their current target range of 3.75% to 4% – up from 84.5% a week ago and 35.8% last month.

For the Fed's meeting in mid-December, the tool shows a 75.1% probability of a 25-basis-point interest rate hike, which could mark the resumption of the rate-hiking cycle if inflation remains elevated.

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Inflation rose faster than expected in September and remains well above the central bank's 2% target. (Robert Nickelsberg/Getty Images)

"The Federal Reserve will definitely hike interest rates again, probably in December," Long said. "The big question is how many more times do they have to hike after that? And what was scary in this latest inflation data for September is to see so many areas of hot inflation: to see used car prices, airfares, recreation costs, auto repair costs, buying a used car, medical costs."

"The story really is starting to take shape that it's probably going to take a couple more hikes in 2027, and this higher-for-longer borrowing costs and mortgage rates well above 7% is going to stick around for at least a year, maybe longer," Long said.

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The CME FedWatch tool shows the market is anticipating multiple rate hikes by March, with a 46.5% chance that rates will be 50 basis points higher than they are now at a range of 4.25% to 4.5%.