Economides says election proximity makes radical Fed action less likely

Oil briefly traded above $117, its highest in more than six months

The Guardian reported that oil prices have soared with the closure of the Strait of Hormuz, which the outlet described as a crucial passageway for trade. Oil traded briefly above $117 a barrel earlier in the week, its highest price in more than six months. The outlet also reported that rising prices this year had largely been driven by the war in the Middle East with Iran.

Inflation rose from 3.4% in August to 3.7% in September, its highest level since spring. The annualized inflation rate remained above 3% for most of this year, while inflation overall had hovered above the Fed’s 2% target for years.

Interest rates determine the cost of interest for loans, including credit cards, mortgages and some savings accounts. During times of high inflation, raising rates can slow price increases.

Economides said that, by itself, hiking interest rates cannot solely address inflation caused by supply shocks. Raising rates helps when the economy is too hot, or when demand outpaces supply, but can be counterproductive otherwise. “If inflation is caused by supply factors, it doesn’t make sense to try to cure it by increasing interest rates because it won’t work,” he said. “It will slow down the economy at a time in which you don’t want it to slow down.”

Fed chair Kevin Warsh has suggested that present-day inflation has persisted beyond the war and that the central bank’s decision to raise rates was intended to prevent prices from creeping up further. At the Fed’s September meeting, he said, “We cannot affect any individual price, whether it be oil prices, whether it be foodstuffs at the grocery store.”

He continued: “But what we can do, and will do, is ensure that any change in relative prices don’t broaden out, don’t have second and third-order effects on the economy. That’s what we’re tasked to do, and that’s what we will do.”

The Guardian reported that multiple Fed leaders have suggested in recent weeks that the central bank has room for a pause, even as most Fed economists are predicting one more rate hike before the end of the year. “The hikes do not need to come at consecutive meetings, but they should be in place in an acceptable period of time,” Fed governor Christopher Waller said earlier this month.

Against that backdrop, the Federal Reserve was expected to leave interest rates unchanged Wednesday at its final rate-setting meeting before the midterm elections. The expected pause would keep rates at one of the highest pre-election levels seen in more than 20 years and signal a wait-and-see approach. Last month, Fed officials raised rates for the first time since 2023, citing rising inflation.

Nicholas Economides, a professor of economics at the NYU Stern Business School, said the election’s proximity made it more likely that the Federal Reserve would “not take any radical action.” “Even if the Fed were to do something radically different, the economy would not have time to adjust before the elections,” he said.

After the September increase, Donald Trump said that “interest rates in the United States should be 1% or less”.

The Guardian reported that the higher cost of living was expected to play a crucial role in the upcoming midterm elections, which will determine which party controls Congress. Across multiple polls, the economy was cited as the top issue for voters.