Fed Expected to Hold Rates Steady Days Before US Midterm Elections

The US Federal Reserve is set to announce its interest rate decision on Wednesday evening, just six days before the midterm elections. The market consensus anticipates that the rate will remain unchanged within the 3.75%-4% range, despite high inflation and a previous rate hike in September, the first since 2023. The upcoming elections, where all 435 House members and 35 of 100 Senators will be chosen, could impact President Trump's economic agenda if Republicans lose control of either chamber. The economy and cost of living are central issues in the election campaign, with 85% of voters citing the economy as a top concern.

Futures markets indicate a roughly 73% probability of a rate hike in December, after the elections. The September rate increase of a quarter percentage point followed months of deliberation regarding temporary price increases caused by the war in Iran and tariffs. Oil prices have fluctuated significantly, reaching $112 per barrel in April before dropping to $71 in July, and then rising to $115 this week. The Consumer Price Index rose 0.6% in September, with annual inflation accelerating to 3.7%, well above the Fed's 2% target. Gasoline prices surged 9.1% in September, accounting for over half of the overall increase.

Despite market expectations for a hold this week, some analysts, like those at Leader Capital Markets, believe there's a 50% chance of a hike due to continued price pressures and strong economic activity. Fed officials Philip Jefferson and John Williams have previously indicated the need to examine more data before the next move. A Reuters survey showed 94 out of 100 economists expecting no change this week but anticipating a December hike.

Fed Chairman Kevin Warsh, appointed by President Trump, led the September rate hike. Trump had previously criticized former Fed Chairman Jerome Powell for not lowering rates quickly enough. Warsh described the September hike as removing some of the stimulus from accommodative monetary policy, suggesting current rates are not yet sufficiently restrictive. James Eglighoff, Chief US Economist at BNP Paribas, suggested that this year's rate increases might be the start of a longer tightening cycle.

Economists like Alex Zbezhensky from Meitav note that current inflation drivers, such as the war and AI investments, are largely insensitive to interest rates. Conversely, sectors already affected by rising credit costs are not the primary drivers of inflation. This suggests central banks may aim for minimal rate hikes. Meitav also points out that investments in data centers have surged 73% in the past year, while other non-residential construction has fallen 10%. This indicates that higher interest rates might cool sectors already under pressure rather than address the root causes of inflation.

Potential further US rate hikes could affect the dollar's exchange rate, global bond yields, and financing conditions in Israel. The Bank of Israel recently maintained its interest rate at 3.25% after three consecutive cuts, with annual inflation at 1.6%. The shekel weakened by 3.1% against the dollar in the week preceding the Bank of Israel's last decision. Yossi Menashe of Altshuler Shaham Financial Services stated that rising energy prices, a weaker shekel, and the global monetary environment limit room for further rate reductions in Israel. Meitav forecasts a 0.25-0.5 percentage point decrease in the Bank of Israel's rate within a year.