Fed Reserve Likely to Skip Rate Hike   10/28 06:04

   The Federal Reserve is expected to stand pat on interest rates Wednesday 
even though inflation has accelerated in the past couple of months as the Iran 
war has caused spikes in oil and gas prices.

   WASHINGTON (AP) -- The Federal Reserve is expected to stand pat on interest 
rates Wednesday even though inflation has accelerated in the past couple of 
months as the Iran war has caused spikes in oil and gas prices.

   The Fed's latest policy meeting concludes less than a week before the 
midterm elections, which have focused heavily on concerns about the cost of 
living and affordability. Consumers have generally soured on an economy weighed 
down by more expensive gas, groceries, and clothing, among other items.

   The Fed, led by Chairman Kevin Warsh, wants to return inflation to its 2% 
target, which it typically does by raising its short-term interest rate. Higher 
borrowing costs, over time, can cool spending and slow inflation. The Fed 
raised its key rate last month for the first time in three years, from about 
3.6% to 3.9%, in what many investors and economists perceived was a first step 
toward a renewed effort to bring down inflation.

   Yet Warsh faces a host of challenges in achieving that goal. President 
Donald Trump slammed the Fed for raising its key rate last month, though he 
largely blamed the central bank's rate-setting committee, rather than Warsh, 
whom he appointed. And some of the forces driving inflation -- specifically the 
rapid buildout of artificial intelligence infrastructure and higher energy 
prices -- won't easily be tamed by higher interest rates.

   At the same time, other parts of the economy are already being hit by higher 
rates, which were lifted by market forces, even before the Fed hiked last 
month. The average 30-year mortgage rate reached a three-year high of 7.4% 
earlier this month, though it has since slipped a bit. Higher mortgage rates 
have made buying a home unaffordable for 5 million more Americans since the 
beginning of the year, according to Oxford Economics, a consulting firm. Over 
time, Fed rate hikes can make mortgages, auto loans, and credit card borrowing 
more expensive, adding to Americans' sense that things like homes and cars are 
getting pricier.

   After the Fed announces its rate decision, Warsh will speak at a news 
conference, where his remarks will be closely watched for hints about the Fed's 
next steps. He will likely repeat the Fed's desire for a "timelier" return of 
inflation to the 2% target. Some may view that as a sign the Fed will boost its 
key rate at its next meeting, in December, a move already widely expected by 
Wall Street investors.

   If the Fed keeps rates on hold, Warsh will be pushed to explain why the 
central bank hiked in September but not this month. Inflation picked up in 
September, when consumer prices rose 3.7% compared with a year earlier. The 
increase was much bigger than the 2.4% rate in February, just before the Iran 
war.

   And on a monthly basis, the consumer price index -- the most widely-followed 
inflation gauge -- rose 0.3% in both August and September. At that pace over a 
full year, inflation would rise much more quickly than the Fed's 2% target.

   On Thursday, a separate inflation measure more closely followed by the Fed, 
the personal consumption expenditures price index, is forecast to have jumped 
3.6% in September from a year earlier, up from 3.4% in August. Core prices, 
which exclude the food and energy categories, are forecast to have risen 3.1%, 
up from 3% the previous month.

   Aditya Bhave, head of U.S. economics at Bank of America, said economists and 
the Fed have gotten too complacent about above-target inflation. Higher oil and 
gas prices will likely keep inflation elevated for several more months, he 
said, and rising diesel costs will elevate shipping prices for nearly every 
type of good, which could spread inflation more broadly through the economy.

   "Unless the Fed takes this problem more seriously and stops essentially 
making excuses about inflation, I think we're not going to get back to 2% until 
the next recession," Bhave said.

   Warsh will likely seek to keep the Wednesday press conference relatively 
short. It was about 30 minutes last month. Warsh's predecessor, Jerome Powell, 
often held news conferences for about 45 minutes.

   The Fed's policy meeting is part of a busy week for central banks around the 
world. The Bank of Canada will also meet Wednesday and is forecast to lift its 
key rate a quarter point, to 2.5%. Policymakers at the European Central Bank 
and the Bank of Japan are both scheduled to meet Thursday and are expected to 
keep their key rates unchanged.

   For Warsh and the Fed, another key consideration is that the U.S. economy is 
growing at a healthy pace and unemployment remains low, at 4.2%, even if hiring 
is also sluggish. The government will report Thursday on growth for the 
July-September quarter, which is expected to reach 3%, according to a forecast 
by data provider FactSet. That would be up from 2.2% in the April-June quarter.

   Many economists argue that solid growth is evidence that interest rates 
aren't particularly high and the economy could withstand higher rates to combat 
inflation.