Industry overview

The Federal Reserve is widely expected to keep interest rates unchanged at its October meeting, even as rising energy costs cloud the inflation outlook and add to the strain on household budgets. The consumer price index rose again in September, lifting the annual inflation rate to 3.7%, and surging oil prices linked to the U.S. war with Iran also pushed September’s producer price index higher. Brent crude traded at a five-month high on Friday before easing slightly.

The Fed raised rates by 25 basis points last month, to a range of 3.75% to 4%, its first increase since 2023. Even so, fed funds futures put the chance of another quarter-point hike at this week’s meeting at less than 10%, according to the CME Group’s FedWatch tool, while nearly 75% expect at least one more hike by year-end.

“Inflation is still the No. 1 problem in the U.S. economy, and there are a lot of signs it is getting more broad-based,” said Heather Long, chief economist at Navy Federal Credit Union. “For consumers, it means really high borrowing costs for the foreseeable future.” She added, though, that the calendar is likely to stay the Fed’s hand: “given that it’s right before an election,” she said, “they won’t hike in October.”

The meeting comes just days before the midterm elections, making it the central bank’s final word on the pace of inflation before voters head to the polls — a vote that could shift how much power each party holds in Washington. Research shows the Fed has mostly stayed its course in past election cycles: the four times it raised rates near a midterm — in 1978, 1982, 2018 and 2022 — each move was tied to rising inflation, according to Mark Shore, director and economist at CME Group.

Fed Chairman Kevin Warsh has pledged to bring inflation down to the Fed’s 2% target. Holding steady carries its own risk, however. “If the Fed holds, markets could question the Fed’s inflation-fighting credibility,” Bank of America economist Aditya Bhave wrote in a research note on Oct. 23.

The Fed’s benchmark rate sets what banks charge one another for overnight loans, and from there it shapes a wide range of borrowing and saving rates. Higher rates can help ease inflation, but in the near term they lift borrowing costs and deepen the affordability crunch many households already face. Shorter-term rates track the prime rate closely — it typically sits about 3 percentage points above the federal funds rate — while longer-term costs respond more to inflation expectations and the broader economy. Mark Zandi, chief economist at Moody’s, said longer-term rates have risen more than short-term ones and are doing more damage to consumer wallets, weighing on refinancing, homebuying and vehicle sales, while higher short-term rates hurt mainly through credit cards, consumer finance loans and home equity lines.

Most credit cards carry variable rates that move with the Fed’s benchmark, so a hold would likely keep card APRs near current levels; the average rate on a new credit card offer is now 23.96%, according to LendingTree. Mortgage rates, by contrast, follow Treasury yields and the economic outlook: the yield on the 10-year U.S. Treasury has been near 5%, keeping the average 30-year fixed mortgage close to 7.4%, according to Mortgage News Daily. With financing costs still elevated, many car buyers are taking on larger loans and stretching repayment terms, according to Edmunds. Federal student loan rates are fixed for the life of the loan, though rates for new borrowers are already higher this academic year following the 10-year Treasury note auction in May. Savings rates, meanwhile, tend to track the federal funds rate — a rare upside to the higher-for-longer outlook, with savers still earning relatively attractive yields on high-yield savings accounts and other deposit products.

Industry overview based on CNBC.

What it means for investors

A hold is already the market’s base case, with traders pricing in less than a 10% chance of a hike this week, so the surprise risk runs toward a hike rather than a cut — and any surprise move would likely jolt bonds and rate-sensitive stocks. The more important signal will be what the Fed says about December, since nearly 75% of the market expects at least one more increase by year-end. The tension Bank of America’s Aditya Bhave flagged is real: holding just before an election could raise questions about the Fed’s inflation-fighting resolve, yet hiking into a vote would be equally fraught. With the 10-year Treasury yield near 5%, the higher-for-longer backdrop keeps pressure on housing, autos and other borrowing-dependent sectors, while it supports yields on cash and deposit products. The wild card is energy: if the war with Iran pushes oil higher again, inflation could force the Fed’s hand regardless of the election calendar, so investors should watch crude prices and the next inflation prints as closely as the Fed’s statement.

What it means for employees

There is no direct employee angle in this story. It is about monetary policy and household borrowing costs, not jobs, wages or workplaces, so there is nothing here to translate into advice for workers.

What it means for customers

For households, the message is that borrowing is likely to stay expensive for a while. A Fed hold would leave credit card APRs near current levels, with the average new card offer already at 23.96%, and mortgages close to 7.4% while the 10-year Treasury yield sits near 5%. Car buyers should expect financing to remain costly, with larger loans and longer terms becoming more common, and new student borrowers are already locked into higher fixed rates for this academic year. The one bright spot is on the savings side: because deposit rates track the federal funds rate, savers continue to earn relatively attractive yields on high-yield savings accounts. With no rate relief in sight, the practical takeaway for consumers is to prioritize paying down variable-rate debt rather than waiting for cheaper borrowing.

Note: Investment calculations and projections are for illustrative purposes only. Market conditions change frequently. Consult a qualified financial advisor before making investment decisions.