Federal Reserve officials agree that inflation needs to return to the central bank's 2% annual target. However, the situation in Iran has caused gasoline prices to surge, with the price increase beginning to spread beyond gas stations. Last month, this prompted Fed officials to raise interest rates for the first time in three years to cool the economy and suppress inflation. But this month, even with the worsening inflation situation, the Fed is widely expected to keep rates unchanged at its meeting on Thursday (October 29th, Beijing time). Would this be the case if the midterm elections weren't just six days away? At the press conference, if the central bank does indeed keep rates unchanged, Fed Chairman Kevin Warsh will likely face questions about political pressure. The Fed's independence is the cornerstone of its monetary policy decisions, but in an election year, this independence is inevitably scrutinized.

Historical pattern: Interest rates are adjusted multiple times around election day in election years.

Aside from maintaining near-zero interest rates during the pandemic, the Federal Reserve has adjusted interest rates within two months of election day in four of the last five election years. For example, in September 2024, the Fed lowered its benchmark interest rate by half a percentage point six weeks before the presidential election, marking the beginning of a rate-cutting cycle due to cooling inflation and officials' concerns about a weakening labor market. In 2022, before the election, the Fed raised rates twice by 75 basis points, three times the typical rate hike, to combat the worst inflation in nearly four decades; a further 50 basis point hike was announced at the meeting after election day. In 2016, officials did not change rates at the two meetings before election day, but raised rates by 25 basis points at the subsequent meeting. At that time, Philadelphia Fed President Patrick Harker supported the September rate hike but opposed raising rates at the November meeting, just six days before the presidential election. In October 2016, Harker stated, "My concern is that, depending on the election results and what happens afterward, if there are policy distortions that we have to respond to, then we have to respond." Harker added, "I don't know which way it's headed. But waiting might be prudent until some of the uncertainty is resolved." However, then-Federal Reserve Chair Janet Yellen stated that the election did not play any role in officials' decision-making process.

This week's logic: Economic conditions do not support an immediate interest rate hike; awaiting more data.

Prior to this meeting, Federal Reserve officials had signaled that economic conditions did not support another immediate rate hike, preferring to wait for more data. This is because raising rates too early could unnecessarily weaken the economy—for example, rising borrowing costs could prompt consumers to cut spending. This prudent approach contrasts with President Trump's calls for rate cuts. Elected officials, especially presidents, tend to favor lower interest rates because they make borrowing cheaper for consumers and businesses. Trump's approval ratings have wavered in recent months due to rising gasoline and other costs, increasing pressure on the Fed to cut rates. After repeatedly criticizing the Fed for not aggressively cutting rates, Trump selected Warsh to replace Fed Chairman Jerome Powell. But Warsh's first major move as central banker was a rate hike, which many saw as a signal that he would not allow political interference in Fed policy.

The communication dilemma: tightening measures shouldn't appear to target the government, while remaining inactive shouldn't seem to be appeasing.

Nevertheless, if the Federal Reserve keeps interest rates unchanged as expected, Warsh may need to work harder than usual to convince Americans that the political calendar is not involved in the decision-making process. (While the Fed chair wields considerable power, the position represents only one vote on the 12-member committee.) EY-Parthenon's chief economist, Gregory Daco, stated in a report last week that "tightening cannot appear as a move against the government, nor can holding back appear as appeasement." Meanwhile, Aditya Bhave, head of U.S. economic research at Bank of America, pointed out that raising rates now, given investors' expectations that the Fed will keep rates unchanged, could catch the market off guard and trigger further volatility in an already tense situation.

Summarize

Federal Reserve officials unanimously agree that inflation needs to return to the 2% target. The situation in Iran has pushed up oil prices, with the price increases spreading from gas stations, prompting the Fed to raise interest rates for the first time in three years last month. However, even with worsening inflation this month, the market generally expects rates to remain unchanged on Wednesday, with the economic rationale being that officials believe conditions do not support an immediate rate hike and prefer to wait for more data. However, with only six days until the midterm elections, this decision will inevitably be placed under the political microscope. Historically, excluding the pandemic period, the Fed has adjusted interest rates within two months of election day in four of the last five election years. Warsh's September rate hike was seen as a signal against political interference in policy, but if rates remain unchanged this week, he may need to work harder to convince the public that the political calendar does not influence decision-making. "Tightening cannot appear to be targeting the government, and holding rates steady cannot appear to be appeasing," one economist summarized the communication dilemma.