First, look at history.
According to a UBS report, in the 35 years since 1990, the Federal Reserve has never raised interest rates in an election year, as the Fed aims to maintain neutrality and avoid favoring either the ruling or opposition party.
However, this record of no rate hikes in October during election years is not zero, but nearly zero. In election years before and after 1990, there were indeed instances of rate hikes in October.
In 1980, a presidential election year, the U.S. was experiencing severe hyperinflation, with CPI rising 14.8% year-on-year in March 1980. Then-Fed Chair Paul Volcker raised rates consecutively in September and October 1980 to curb inflation.
In 2000, another presidential election year, the Fed continued the rate-hiking cycle initiated in June 1999 to cool the overheating economy and potential inflationary pressures caused by the late-1990s internet bubble, raising rates by 0.5 percentage points in October 2000 to 6.5%.
There was also a rate hike in September 2004.
The reason for rate hikes in September and October of election years mentioned above was due to signs of worsening inflation. Thus, from the Fed's perspective, rate hikes in September and October of election years were driven by deteriorating inflation conditions rather than political motives. How about this year?
On September 28, Bloomberg reported:
Key economic data to be released at the end of September are expected to further show the U.S. economy strengthening, providing more support for several Fed officials' arguments that interest rates should be raised further.
Recent data show U.S. retail sales grew in August, and business activity expanded in September at the fastest pace in over five years, increasing market expectations that the Fed could raise rates again as early as October.
But good news on economic growth comes at a cost: inflation remains above the Fed's 2% target, forcing the central bank to consider another rate hike, further pressuring households and businesses. Earlier in September, the Fed raised rates for the first time in three years. Adding to the tension, the Fed's next rate decision will be announced just days before the midterm elections.
Data released at the end of September could tilt the debate in one direction.
Economists expect data to be released on September 30 will show a significant increase in real U.S. consumer spending in August, likely the largest gain this year. Meanwhile, the Fed's closely watched core inflation indicator, after adjustments, is expected to decline by up to 0.3 percentage points year-on-year, but month-on-month data are less reassuring.
The core personal consumption expenditures (PCE) price index, excluding food and energy, is expected to rise 0.3% month-on-month, accelerating from the previous two months.
Then, on October 2, the latest employment data will be released, expected to show continued strong job growth. As of September 25, economists expect U.S. employers added about 90,000 jobs in September, with the unemployment rate likely remaining at 4.1%.
JPMorgan Chase Chief U.S. Economist Michael Feroli said that if businesses continue hiring at recent rates, the market's current expectation of a slow rate increase could change.
Feroli said, "For the past few years, inflation seems to have been primarily supply-driven. But if the labor market tightens further and wage growth accelerates, I think we might start to feel that the good news on economic growth is becoming too much."
Several Fed officials issued warnings last week in speeches and public appearances, stating that inflation remains too high. Fed Governor Michael Barr said further rate hikes might be needed to curb price increases; Chicago Fed President Austan Goolsbee warned that the process of bringing inflation back to the Fed's 2% target will not be painless.
Goolsbee, Richmond Fed President Tom Barkin, Cleveland Fed President Beth Hammack, and Philadelphia Fed President Anna Paulson also pointed out signs that the overall U.S. economy is gathering momentum, albeit at a slower pace.
Hammack said on Friday (16th), "What's concerning is whether we'll see the economy starting to heat up? Currently, when I travel around my district and talk to businesses, what I hear is that spending is very resilient."
Historic prosperity in the field of artificial intelligence is driving construction and manufacturing activities, and businesses and households continue to spend despite sharp oil price increases related to the Iran war.
As investors bet that the Fed will raise rates at least once more this year, bond yields have also become another factor policymakers need to consider.
U.S. Bank Chief Economist Beth Ann Bovino said, "Part of the inflation we're seeing now is precisely because the economy is so strong. The possibility of another rate hike is becoming very real."
As of last weekend, federal funds futures pricing indicated a market probability of about 65% that the Fed would raise rates in October.
It should be clear that not all sectors of the U.S. economy are booming, and over-reliance on the AI boom could eventually become a vulnerability.
Philadelphia Fed former President and current University of Pennsylvania Wharton School professor Patrick Harker warned that higher borrowing costs will expose underlying economic vulnerabilities, especially for households with weaker financial conditions.
Harker said, "I do think we have to be cautious." He said the U.S. economy is currently "mainly driven by one very strong engine, namely data center construction and the accompanying power grid construction. The rest of the economy seems to be just coasting, without much real growth."
New York Fed data show that credit card and auto loan delinquency rates have been on an upward trend in recent years. In the first quarter of this year, credit card delinquency rates rose to the highest level since 2011, remaining high in the second quarter. With mortgage rates rising to the highest level in over two years, the housing market has stalled. For the real economy, the impact of rising borrowing costs cannot be ignored.
Aurelius Chaves is one of those feeling this pressure. He is the president and owner of Midland Machinery, a company based in Tonawanda, New York, that produces road construction equipment. From employee healthcare to business insurance, he has had to deal with significant cost increases across the board. When the Fed raises rates, it not only increases his own loan costs but also raises financing costs for equipment dealers who purchase his products.
Chaves said, "My products are sold through a dealer network, so when their costs go up, they start cutting inventory. I'm well aware that every 25-basis-point rate hike will cost me more in interest next year."
Chaves said his overall business remains stable, and other indicators confirm this.
The "Orange Book," compiled by Bloomberg Economics and Bloomberg Industry Research, found that over two-thirds of industries mentioned in recent earnings call conferences that economic recovery is accelerating, with most attributing this to the AI investment boom.
This strong momentum has also caught the attention of Fed Chair Wach. When explaining the Fed's recent rate hike decision, he linked it to some extent with an optimistic outlook on accelerating economic growth. Wach told reporters on September 16, "Given the various shocks and uncertainties in the geopolitical environment, you begin to appreciate the resilience of the U.S. economy."
If policymakers decide to raise rates again on October 28, just days before the crucial midterm elections, Wach will face the challenge of how to convey this message to Trump, who appointed him to this position.
Although U.S. President Trump has toned down his criticism of the Fed, he made his stance clear at Wach's swearing-in ceremony in May.
Trump said at the time, "Unlike some of his predecessors, Kay understands that economic prosperity is a good thing. We don't need to overreact; let the economy continue to prosper."
Bloomberg's September 28 hawkish yet still dovish expectation for September CPI was cooled by the actual CPI release, with core inflation still hovering above 3%, and high energy prices beginning to seep into the service sector. Once formed, persistent high inflation will follow, a point to be discussed later.
*Wach avoids comment*
The market's immediate reaction is rate hikes? At this point, shift focus: don't pay too much attention to the 10-year U.S. Treasury yield; instead, pay close attention to the 2-year U.S. Treasury yield, reasons to be discussed later.
After the release of the U.S. September CPI data, Wach attended the IMF meeting in Bangkok. The market hoped to hear his comments on the hot U.S. September CPI, but he avoided it, adopting a "blank space" approach. Unexpectedly, this "blank space" technique from Chinese painting is also applicable in financial decision-making.
On this globally watched issue of the Fed's reaction to the hot September CPI and the October rate direction, Wach's "blank space" even prompted IMF Managing Director Kristalina Georgieva, who was interviewing him on site, to joke, "Wach disappointed half, if not more, of the audience." Wach responded, "This is a new chapter for the Fed; we no longer do this sort of thing."
What Wach referred to as no longer doing this sort of thing means not providing any forward guidance on rates to the market.
After Wach insisted on leaving a blank, the market odds for a Fed rate hike in October rose in one unchanged category and fell in the rate hike category.
So, will the Fed raise rates in October?
1. Based on economic realities, it should raise rates,
2. Based on political considerations, it should not.
Which will you bet on: economics or politics? The author bets on politics because Wach's boss, the "dumb king," doesn't want a rate hike in October. What about December? What about 2027? If inflationary pressures continue to rise, Wach will raise rates, as the midterm elections on November 4 will have settled. If the Democrats return to power then, a Democratic Congress or Senate will not let Wach off the hook for not raising rates amid rampant inflation.
(Investing involves risk, and each investor's risk tolerance varies; independent thinking is essential. The author will buy and sell according to market conditions.)
*The signed and/or unsigned articles published in
