Federal Reserve officials agree that inflation must return to the central bank's 2% annual target.
However, the situation in Iran has sent gasoline prices soaring, and price increases are beginning to spread beyond the gas pump.
Last month, this prompted Fed officials to raise rates for the first time in three years to cool the economy and push inflation down.
But this month, even as the inflation picture worsens, the Fed is still widely expected to hold rates steady at its meeting on Thursday (October 29) Beijing time.
Would that still be the case if the midterm elections were not just six days away?
At the press conference, if the central bank does 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, that independence is inevitably subject to scrutiny.
Historical pattern: rate moves around Election Day in multiple election years
Aside from the pandemic period, when rates stayed near zero, the Fed adjusted rates within two months of Election Day in four of the last five election years.
For example, in September 2024, the Fed cut its benchmark rate by half a percentage point six weeks before the presidential election, marking the start of an easing cycle as inflation cooled and officials grew concerned about a weakening labor market.
Before the 2022 election, by contrast, the Fed raised rates by 75 basis points twice in a row — triple the typical hike — to fight the worst inflation in nearly four decades, and then announced a 50 basis point increase at its meeting after Election Day.
In 2016, officials left rates unchanged at both meetings before Election Day and instead raised by 25 basis points at the following meeting.
At the time, Philadelphia Fed President Patrick Harker supported a September hike but said he opposed raising rates at the November meeting, just six days before the presidential election.
Harker said in October 2016: "My concern is that, depending on the election outcome and what happens afterward, if a policy creates a distortive effect and we have to respond, then we have to respond."
Harker said: "I don't know which direction it will go. But waiting may be prudent until some of the uncertainty is resolved."
Still, then-Fed Chair Janet Yellen said the election did not play any role in officials' decision-making process.
This week's logic: economic conditions do not support an immediate hike, and more data is needed
Ahead of this meeting, Fed officials have signaled that economic conditions do not support another immediate rate hike and that they would rather wait for more data.
That is because raising rates too early could unnecessarily weaken the economy — for example, higher borrowing costs could prompt consumers to cut back on spending.
This cautious approach contrasts with U.S. President Trump's calls for rate cuts.
Elected officials, especially the president, tend to prefer lower interest rates because they make borrowing cheaper for consumers and businesses.
Trump's approval rating has wavered in recent months amid rising gasoline and other costs, increasing pressure on the Fed to cut rates.
After repeatedly criticizing the Fed for not cutting rates aggressively, Trump chose Warsh to succeed Fed Chair Jerome Powell.
But Warsh's first major action as head of the central bank was a rate hike, which many see as a signal that he will not let politics interfere with Fed policy.
Communication challenge: tightening must not look targeted at the government, and holding steady must not look like appeasement
Even so, if the Fed holds rates steady as expected, Warsh may need to work harder than usual to convince Americans that the political calendar played no part in the decision. (Although the Fed chair holds considerable power at the Fed, the position represents only one vote on the 12-member committee.)
Gregory Daco, chief economist at EY-Parthenon, said in a report last week that "tightening must not look like a move against the government, while standing pat must not look like appeasement."
Meanwhile, Aditya Bhave, head of U.S. economic research at Bank of America, noted that because investors expect the Fed to keep rates unchanged, a hike at this point could catch the market off guard and trigger further volatility at an already tense moment.
Summary
Fed officials agree that inflation must return to the 2% target, and the situation in Iran has pushed oil prices higher, with price increases spreading beyond the gas pump, prompting the Fed to raise rates last month for the first time in three years.
But this month, even as inflation worsens, the market still widely expects the Fed to hold steady on Wednesday, with the economic rationale being that officials believe conditions do not support an immediate hike and would rather wait for more data.
Yet with the midterm elections only six days away, the decision is inevitably being placed under a political microscope.
History shows that, aside from the pandemic period, the Fed adjusted rates within two months of Election Day in four of the last five election years.
Warsh's September hike was seen as a signal that he would not let politics interfere with policy, but if the Fed holds steady this week, he may need to work harder to persuade the public that the political calendar played no role in the decision.
"Tightening must not look like a move against the government, and standing pat must not look like appeasement," one economist summed up the communication dilemma.
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