The election could transform the final two years of Trump’s term, as well as producing bitter disputes over the results and setting the stage for the race to succeed the president in 2028. A Democratic House would stall Trump’s legislative agenda and wield subpoena powers to investigate his administration, family business dealings, and conduct of the Iran war. Winning back the Senate would also let Democrats block Trump’s judicial and cabinet nominees.

“We’re on the verge of taking back control of the House of Representatives,” Hakeem Jeffries, who leads Democrats in the lower chamber of Congress, told CNN. “I don’t want to attach any particular percentage point other than making it clear it’s very likely we’re going to get this done.” All 435 House seats and 35 of the 100 Senate seats are being contested, alongside governorships in 36 states. Democrats need only to flip three House seats and four in the Senate for unilateral control of Congress.

– Republican heartland –

The US war with Iran, launched in February, has driven fuel costs sharply higher, adding to the squeeze on voters from tariffs and persistent inflation. Trump’s approval rating has meanwhile sunk to levels rarely seen by a president. A Reuters/Ipsos poll last week put it at 31 percent, his lowest across both terms, while a New York Times/Siena survey found an 11-point Democratic lead among likely voters. The electoral map tells a similarly stark story. Republicans are fighting competitive Senate races in Kansas, Texas, Iowa, Ohio, and Alaska — all states Trump won by double digits in 2024.

In an extraordinary change of priorities, the main group financing Republican Senate advertising diverted resources from North Carolina to Kansas, which has not elected a Democratic senator since 1932. Democratic candidates have meanwhile enjoyed formidable fundraising, although Republican outside groups have spent heavily to defend their seats, aided by hundreds of millions of dollars from billionaire Elon Musk. A redistricting battle has also given Republicans an advantage in some House seats, while Trump’s campaign rallies aim to mobilize loyal supporters who often stay home when he is not on the ballot.

– Disputed verdict? –

More than 23 million early ballots had been cast by the weekend — up from around 15 million at the comparable point in 2022 — with habitual Republican voters lagging their Democratic counterparts in several states. But there are fears the contest may not end with the counting of ballots. Trump’s repeated, unsubstantiated claims of election fraud have prompted Democrats and voting-rights organizations to prepare legal teams and observers for disputes or federal interference.

The administration says federal election monitors will follow the law and has denied plans to send troops or immigration agents to polling stations. Whatever the result, the vote also marks the beginning of the long political transition toward 2028, when the constitution bars Trump from seeking another elected term. It will offer an early test of whether the Republican movement he remade can thrive beyond his presidency — and also which Democrats emerge to challenge his most likely successors, with Vice President JD Vance best positioned so far to lead the post-Trump party.

Republican House Speaker Mike Johnson told Fox News on Sunday his party would be standing on the promises it had delivered on since 2024. “Every voter has to ask themselves a simple question: which candidate is best for me and my family, my children, my aging parents?” he said. “In every one of these cases, the Republican is offering commonsense solutions and a steady hand at the wheel. And the Democrats are becoming increasingly crazy.”

– Frankie TAGGART

© 2024 AFP

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The Fed has missed its long-term two-percent target for inflation for more than five years, and at its last meeting in September, the FOMC voted to raise the key federal funds rate for the first time in three years, lifting the target range to 3.75 percent to 4.0 percent. The Fed’s meeting comes days ahead of key midterm elections in the United States on November 3, with the Democratic Party seeking to wrest control of both houses of Congress from US President Donald Trump’s Republicans.

Trump frequently berated and criticized Fed Chair Kevin Warsh’s predecessor, Jerome Powell, over interest rates—which he deems to be too high—but has so far refrained from targeting the man he appointed to replace him over the issue. The Fed’s preferred gauge for inflation, the Personal Consumption Expenditures (PCE) price index, hit a pandemic-era peak of 7.2 percent in 2022, before a series of interest-rate hikes tamed it to around 2.2 percent by late 2024.

Trump’s economic policies—including his upending of the global trade order using tariffs and his war on Iran—fuelled it once more, and it hit a three-year high of 3.9 percent in May. Since the United States and Israel attacked Iran in late February, global energy prices have skyrocketed, with Tehran’s retaliatory actions sharply curtailing oil and gas supplies through the Gulf. Higher energy prices have begun to cascade through into other goods and services, fuelling inflation in the United States, with prices a key issue for voters as they head to the polls.

– ‘Based on the economics’ –

Loretta Mester, former regional head of the Cleveland Fed, told AFP that the timing of the meeting just days ahead of the election would not be a factor for policymakers. “The Fed doesn’t take into account any kind of political issues in that FOMC room,” she said. “It really is based on the economics.” Mester argued that the fundamentals call for continuing to raise interest rates. “The data that’s come in continue to show a stable labor market and continue to show inflation above target,” she said, adding that there was no evidence that it was on a path downwards towards the target. “The economics would suggest then you need to continue raising rates.”

Still, she thought that most policymakers seemed keen to avoid moving too quickly, and may hold rates at this meeting, waiting to tighten the screws until the following meeting in early December. Wendy Edelberg, a senior fellow at the Brookings Institution, believes central bankers would rather not put themselves in the middle of the political debate ahead of the midterms. “It’s unhelpful for everyone if the Fed gets wrapped up in all the political discourse right before an election,” she told AFP.

Edelberg said that “there wouldn’t be huge economic implications” if policymakers raised rates in December as opposed to October. She saw such a decision less as a “nod to Trump”—who has aggressively demanded lower rates to spur economic activity—and more a way to avoid being the potential target of political barbs.

Since returning to power last year, the US president has waged an unprecedented assault on the Fed’s independence, launching a criminal probe against Powell and attempting to unseat Fed Governor Lisa Cook. The probe against Powell was dropped to smooth the way for Warsh’s Senate confirmation, but the battle to fire Cook continues despite a Supreme Court decision nullifying an earlier attempt to do so. Last week, Cook declined to attend a hearing in the White House’s probe into mortgage fraud allegations, which she denies.

– Myriam Lemetayer and Asad Hashim

© 2024 AFP

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The Producer Price Index was up 6.3 percent from a year ago last month, according to the Labor Department, significantly above the 5.5 percent expected in a forecast published by MarketWatch. The acceleration from August was also the biggest year-on-year jump since December 2022, the department said. On a month-on-month basis, PPI rose by 1.3 percent, the widest advance since March 2022. This was similarly a sharp increase from the 0.5 percent rate in August. Half of the September uptick for goods costs can be “traced to prices for gasoline, which jumped 20.3 percent,” the report said. “The indexes for diesel fuel, fresh and dry vegetables, jet fuel, residential electric power, and crude petroleum also rose,” it added.

A day prior, government data showed that the consumer price index — a key gauge of inflation — climbed more than expected to 3.7 percent in September. While price increases may not lock in a second consecutive interest rate hike this month by the US central bank, the odds of higher rates to tamp down inflation have climbed. With a second straight day of “higher-than-expected inflation numbers, it seems the Fed will have no choice but to raise rates again this year,” said Chris Zaccarelli, chief investment officer of Northlight Asset Management.

– Consumers losing steam? –

Even though US consumer spending appears to be holding up, analysts expect household behavior to reflect the growing pinch from rising costs. A separate Commerce Department report showed Thursday that retail sales grew by 0.8 percent month-on-month in September to $745.0 billion. This was slower than the 1.3 percent pace in August. The numbers, adjusted for seasonal changes but not inflation, likely reflect the sharp price hikes in energy costs too.

“That headline figure doesn’t tell us much about the health of the consumer, as it was almost entirely driven by a price-related jump in gasoline spending,” said Michael Pearce of Oxford Economics. He expects consumers will lose steam heading into the year-end holiday shopping season, bogged down by higher prices. Sales continued to rise at restaurants and bars, by 1.1 percent, likely due to spending by higher-income households, Pearce said. Sales sharply rose at gasoline stations by 6.4 percent. Excluding gasoline stations, however, retail sales rose a tepid 0.2 percent.

“The moderation in core retail sales, along with a sharp pullback in auto sales, suggests that real consumer spending was likely flat in September,” Nationwide chief economist Kathy Bostjancic warned in a note. Stripping out auto sales and that at gasoline stations, overall retail sales was also just up by 0.2 percent from the prior month. “The key to sustaining resilient spending will be the health of the labor and equity markets. If the unemployment rate remains low, meaning consumers have a job, they will continue to spend, even if more cautiously,” Bostjancic said.

– Beiyi SEOW

© 2024 AFP

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The consumer price index (CPI) rose 3.7 percent year-on-year in September, the Department of Labor said, more than the 3.6 percent forecasted by analysts according to MarketWatch. This was a notable acceleration from 3.4 percent in August, in one of the last major economic reports before the November 3 vote. Inflation picked up pace on a month-on-month basis too, accelerating from 0.4 percent in August to 0.6 percent last month. Gasoline costs accounted for more than half of the monthly CPI jump, surging 9.1 percent in September.

The higher-than-expected inflation reading has raised the odds of a second straight interest rate hike at the US central bank’s October 27-28 policy meeting, although many expect the Federal Reserve to proceed cautiously. Economist James Knightley at ING noted that Fed officials John Williams, Philip Jefferson, and Christopher Waller have suggested “that we don’t need to see back-to-back interest rate increases,” instead leaning towards “a slow and steady” approach. He expects the Fed will want to be “careful and cautious in terms of its policy tightening.”

Traders see a 37.1 percent chance that the Fed will raise rates by another 25 basis points in October, according to CME Group’s FedWatch tool. The probability was around 22 percent a day prior. “We expect at least two more rate hikes by early 2027, starting in December,” said KPMG chief economist Diane Swonk. “September gave the Fed more reason to hike, even if officials hold in October.”

Industries sensitive to interest rates, including housing, are already under pressure from steeper borrowing costs. Yields on US government bonds spiked after the inflation report. The 10-year Treasury yield, which influences rates on mortgage and auto loans, rose to 5.3 percent from 5.2 percent. But it has since moderated.

– Spillover –

“Energy lit the match; sticky services, shelter, and goods prices kept the fire burning,” said KPMG’s Swonk of the inflation report. Energy prices have soared since the United States and Israel attacked Iran in late February, prompting Tehran to block off the Strait of Hormuz, a vital route for oil and gas shipments. Average prices at US gasoline pumps have surged more than 45 percent since the start of the Middle East war to $4.33 per gallon, according to AAA motor club data. Diesel prices have soared even more, by 67.7 percent, boosting the cost of transporting goods and threatening further spillovers to consumers.

“Again, the Iran-US conflict has led to higher motor fuel costs that everyone is experiencing,” ING’s Knightley told AFP. “The US is also seeing substantial increases in airline fares,” he said, adding that this will likely contribute to additional price pressures. Core CPI, which excludes volatile food and energy prices, was up 2.6 percent from a year ago.

Although high gasoline and diesel prices drove about half of the September spike in inflation, “it’s starting to spill into other areas,” warned Heather Long, chief economist at the Navy Federal Credit Union. “Airfares, used cars, and recreation all had big price jumps,” she added. “Americans are seeing their pay totally wiped out by inflation. That’s been the case for half a year now.”

With the underlying US economy remaining strong as massive spending linked to the artificial intelligence buildout boosts demand for chips and labor, economists also caution that higher costs could continue filtering through to households.

– Beiyi SEOW

© 2024 AFP

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The IMF warned that while many advanced economies have been buoyed by rising investment in artificial intelligence (AI) technology, poorer countries that are not benefiting from that boom face stark choices as they deal with high energy prices due to the US war on Iran. “The global economy has been resilient, but that resilience is under strain, with risks to growth tilted to the downside,” said Silvana Tenreyro, the IMF’s chief economist.

– ‘Bifurcated outlook’ – The United States’ war on Iran, launched in February, has plunged the Middle East into violence and seen global energy prices skyrocket as a result of Tehran’s retaliatory actions. Prices of refined petroleum products remain between 70 and 95 percent above pre-war levels, putting pressure on countries dependent on energy imports for economic activity. The war is in its eighth month, and Tenreyro warned that “a prolonged conflict in the Middle East could put additional pressures on inflation and slow down growth.”

Energy-importing countries not exposed to the AI boom remain the most vulnerable, creating what the IMF termed a “bifurcated outlook” in its WEO report. The report detailed that the twin economic forces of the war in Iran and the AI technology boom had created a “fragmented” world economy. “Headwinds from a prolonged war and persistent geopolitical tensions could revive inflationary pressures, strain fiscal and external positions, and hit energy-importing and low-income countries hardest,” it said. “At the same time, the current technology tailwind could stop abruptly if expectations about AI-related profits and productivity gains are reassessed, weakening investment and tightening financial conditions.”

– Contraction here, growth there – The IMF’s split view of the world economy was evident in its specific projections. The Middle East and Central Asia region, exposed directly to the Iran war as Tehran has targeted Washington’s Gulf allies, saw the IMF forecast economic contraction of 0.3 percent in 2026. Saudi Arabia saw one of the sharpest falls in projected growth, with the IMF forecasting a contraction of 3.3 percent — a cut in the forecast of 5.0 percentage points. The IMF said the region is expected to bounce back quickly once the war is over, but there remains high uncertainty as to when that will be.

In advanced economies, growth fuelled by the AI boom and other factors remained strong. The world’s advanced economies were forecast to grow by 2.1 percent in 2026, with those in the AI supply chain such as Taiwan and South Korea posting significantly higher figures. Growth in China, the world’s second-largest economy, was expected to slow by 0.5 percentage points to 4.5 percent this year, the IMF said, mainly due to weak domestic demand. Global inflation remained set to accelerate to 4.7 percent in 2026, fuelled by the Iran war and the AI boom, with effects spread across both advanced and developing economies.

– ‘Urgent action’ – IMF Chief Economist Tenreyro warned that “urgent action” was required by all countries in the face of downside risks. On the fiscal side, she called on governments to only use temporary and targeted measures to help ease the burden on the public of high energy and other costs. In lockstep, “monetary policy should remain firmly focused on price stability,” she added, indicating that interest rate hikes to curb high inflation were appropriate. “The economy has been resilient, but that resilience is reaching its limits,” she said. “The task ahead is to move from coping to rebuilding, restoring fiscal space, and rebuilding supply-side resilience.”

© 2024 AFP

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“The contributors to the increase in real GDP in the second quarter were consumer spending, investment, and exports. Imports, which are a subtraction in the calculation of GDP, increased,” the Bureau of Economic Analysis said in a statement. The new data will come as a boost to US President Donald Trump as his Republican Party heads into key midterm elections in November, with the state of the economy a major issue for voters. Analysts said much of the upward revision came from sectors exposed to the Artificial Intelligence (AI) technology boom. “The annual revisions show AI contributed more to growth and less to inflation in recent years than previously thought,” said Michael Pearce, chief US economist at Oxford Economics.

The BEA also revised upwards its estimate of GDP growth in the first quarter of this year by 0.4 percentage points to 2.5 percent. That change was primarily driven by upward revisions to consumer spending and services exports, the department said.

– Inflation steady –

In a separate release, the BEA said the US Federal Reserve’s preferred inflation gauge stood at 3.4 percent year-on-year in August, unchanged from the month before after a revision to the July data. US households and businesses have been battered by years of high prices since the pandemic, with the Fed missing its long-term two-percent target for inflation since early 2021. Earlier this month, the Fed raised interest rates for the first time in three years to combat the inflation.

The Personal Consumption Expenditures (PCE) price index, the Fed’s targeted gauge, covers a broader range of household spending than the other benchmark metric, the Consumer Price Index (CPI). US inflation has been stoked by some of Trump’s policies, including his imposition of widespread tariffs. His launching of the Iran war has sent global energy prices skyrocketing, with US consumers paying an average of 50 percent more at the pump. Core PCE inflation, which strips out volatile energy and food prices, came in at 3.0 percent year-over-year.

Markets are closely watching inflation data to gauge the Fed’s next move. On Tuesday, an influential US central banker said there was no “urgency” to raise rates again, even as he indicated one more rate hike could be needed before the end of the year. Wednesday’s revisions to PCE data were due to planned methodological changes, including to how the BEA calculates prices for computer-related products, portfolio management, and legal services.

Bernard Yaros, also of Oxford Economics, said the new PCE data was unlikely to sway the Fed from its path of monetary policy tightening, especially given upside risks to energy prices from the Iran war. “Core inflation is still hovering well above target, and risks are firmly stacked to the upside because of the sharp rise in refined petroleum product prices in recent months,” he said.

– Private payrolls bounce back –

The US labor market has been largely stable this year, allowing the Fed to concentrate on the inflation side of its dual mandate. On Wednesday, payroll firm ADP reported that US private sector hiring had bounced back strongly in September, after registering its slowest pace this year the month before. Private sector job growth came in at 90,000 last month, up from 38,000 the month before and well above market expectations.

“It’s a strong report,” said Nela Richardson, ADP’s chief economist. “After a three-month slowdown, job creation rebounded and pay growth remained solid.” ADP’s data is closely monitored ahead of official employment numbers due Friday, although the reports can diverge. Analyst Matthew Martin said ADP’s data underscored “the strength of the labor market.” It “will bolster market expectations for firmer monetary policy from the Federal Reserve as it seeks to ensure inflation is tamped out,” he added.

– Asad HASHIM

© 2024 AFP

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“The contributors to the increase in real GDP in the second quarter were consumer spending, investment, and exports. Imports, which are a subtraction in the calculation of GDP, increased,” the Bureau of Economic Analysis said in a statement. The new data will come as a boost to US President Donald Trump as his Republican Party heads into key midterm elections in November, with the state of the economy a major issue for voters. Analysts said much of the upward revision came from sectors exposed to the Artificial Intelligence (AI) technology boom. “The annual revisions show AI contributed more to growth and less to inflation in recent years than previously thought,” said Michael Pearce, chief US economist at Oxford Economics.

The BEA also revised upwards its estimate of GDP growth in the first quarter of this year by 0.4 percentage points to 2.5 percent. That change was primarily driven by upward revisions to consumer spending and services exports, the department said.

**- Inflation steady -**

In a separate release, the BEA said the US Federal Reserve’s preferred inflation gauge stood at 3.4 percent year-on-year in August, unchanged from the month before after a revision to the July data. US households and businesses have been battered by years of high prices since the pandemic, with the Fed missing its long-term two-percent target for inflation since early 2021. Earlier this month, the Fed raised interest rates for the first time in three years to combat the inflation.

The Personal Consumption Expenditures (PCE) price index, the Fed’s targeted gauge, covers a broader range of household spending than the other benchmark metric, the Consumer Price Index (CPI). US inflation has been stoked by some of Trump’s policies, including his imposition of widespread tariffs. His launching of the Iran war has sent global energy prices skyrocketing, with US consumers paying an average of 50 percent more at the pump. Core PCE inflation, which strips out volatile energy and food prices, came in at 3.0 percent year-over-year. Markets are closely watching inflation data to gauge the Fed’s next move.

On Tuesday, an influential US central banker said there was no “urgency” to raise rates again, even as he indicated one more rate hike could be needed before the end of the year. Wednesday’s revisions to PCE data were due to planned methodological changes, including to how the BEA calculates prices for computer-related products, portfolio management, and legal services. Bernard Yaros, also of Oxford Economics, said the new PCE data was unlikely to sway the Fed from its path of monetary policy tightening, especially given upside risks to energy prices from the Iran war. “Core inflation is still hovering well above target, and risks are firmly stacked to the upside because of the sharp rise in refined petroleum product prices in recent months,” he said.

**- Private payrolls bounce back -**

The US labor market has been largely stable this year, allowing the Fed to concentrate on the inflation side of its dual mandate. On Wednesday, payroll firm ADP reported that US private sector hiring had bounced back strongly in September, after registering its slowest pace this year the month before. Private sector job growth came in at 90,000 last month, up from 38,000 the month before and well above market expectations.

“It’s a strong report,” said Nela Richardson, ADP’s chief economist. “After a three-month slowdown, job creation rebounded and pay growth remained solid.” ADP’s data is closely monitored ahead of official employment numbers due Friday, although the reports can diverge. Analyst Matthew Martin said ADP’s data underscored “the strength of the labor market.” It “will bolster market expectations for firmer monetary policy from the Federal Reserve as it seeks to ensure inflation is tamped out,” he added.

– Asad HASHIM

© 2024 AFP

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Trump has launched an unprecedented assault on the Fed’s independence to set monetary policy since taking office, initiating a criminal probe into Warsh’s predecessor and attempting to fire another Fed governor in his quest for lower rates to spur economic activity. He frequently insulted and berated former chair Jerome Powell, but delivered a muted — if still extraordinary — response to Warsh’s announcement of the rate hike. Trump told reporters he spoke with Warsh before the Fed’s meeting, telling him to “do what you want” and ascribing the decision to raise rates — which the Fed chair voted for and stood by — to a “hostile board.”

Asked by a reporter if he had spoken to the president, Warsh was tight-lipped. And queried on the Fed’s independence, he again offered a tepid defence. “Part of the independence of the Federal Reserve is we stay in our lane. Independence is a two-way street,” he said, responding to a question about Trump’s threat to cut trade ties with some countries if the Fed raised rates. “We let people that do trade policy and fiscal policy stay in their lane, too,” Warsh said.

For Pao-Lin Tien, economics professor at George Washington University, Trump’s version of his conversation with Warsh will fuel the skepticism of those who question the latter’s independence. “That kind of meddling really makes people question a little bit whether the Fed chair is really completely independent,” she said. “Personally, I’m not very convinced.”

– ‘Not a reliable narrator’ –

For others, however, Warsh has been put in a difficult spot. With inflation surging to three-year highs amid the Iran war, and an aggressive president who has made it clear he will channel his anger at friends and foes alike if he does not get what he wants. David Wessel, a senior fellow at the Brookings Institution, thought Warsh managed the situation well. “He got a unanimous vote from the FOMC to raise interest rates and, apparently based on a conversation between the two men, the president doesn’t seem to blame Warsh personally for the rate hike,” he said, referring to the Fed’s interest-rate setting committee.

Still, the president’s assertion that he gave Warsh permission to vote for the hike was “very Trump-like,” he added. “We don’t know what was really said in that conversation. Warsh isn’t talking and Trump isn’t a reliable narrator,” said Wessel. “I doubt he asked Trump for permission, but maybe Trump believes he gave it.”

– ‘Steel in his spine’ –

What is clear to many economists is that a rate hike was needed. Inflation has been above the Federal Reserve’s two-percent target for more than five years, with US households and businesses battered by high prices since the pandemic. Inflation had been on a downward trajectory, but prices have surged in the wake of Trump’s war on Iran, his signature tariff policies, and the ongoing AI boom. Since taking office in May, Warsh has made it clear he was focused on the high prices. “The plain fact is that inflation is too high, and has been for too long,” he told reporters on Wednesday.

The White House insists that any inflation is due to the previous administration, with Trump advisor Kevin Hassett saying earlier this week that there was no need for a rate hike to tackle it. Warsh, however, had a different view, saying that inflation data over the summer did not suggest that price rises were transitory. For Tien, the Fed’s decision to raise rates may have defied Trump’s demands, but it does not necessarily mean much for its independence. “Inflation has been so high for so long that it will be very hard to make an argument to not raise rates,” she said.

Many in financial markets, however, cheered Wednesday’s decision as establishing Warsh’s credibility in going against the White House’s wishes. “Warsh has shown that he has steel in his spine by increasing interest rates seven weeks before the midterm elections,” wrote economist Michael Strain in the Financial Times.

– Asad HASHIM and Myriam LEMETAYER

© 2024 AFP

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And Wednesday’s rate hike may not be the last — the vast majority of Fed policymakers indicated that at least one more rate hike was likely necessary before the end of the year, according to their Summary of Economic Projections (SEP). US households and businesses have been battered by years of higher-than-target inflation, and prices have surged in the wake of Trump’s war on Iran, his signature tariff policies, and the ongoing AI boom. The US president reacted angrily to the decision Wednesday, calling it a “raise against Trump” and accusing the Fed’s rate-setting committee — which he called “hostile” — of making decisions for political reasons. The president has launched an unprecedented assault on the Fed’s independence since taking office, attempting to fire a Fed Governor and launching a criminal probe against Warsh’s predecessor in his quest for lower rates to spur economic activity.

Wednesday’s statements refrained from directly insulting or criticizing Warsh, as Trump was wont to do with former Fed chair Jerome Powell. Trump’s Republican Party faces a stern test in upcoming midterm elections, with rival Democrats seeking to wrest control of both houses of Congress and economic issues front-and-center for voters.

**- Growing calls for hike -** The Fed had held rates steady since January, choosing to wait to gauge the effects of the Iran war’s energy price shocks and to let the impact of tariffs on prices ripple through the economy. Since July, however, a growing faction of policymakers had indicated a rate hike may be required to tame inflation, as the war grinds on and prices remained elevated, particularly for energy. On Friday, August’s consumer price index came in at 3.4 percent — unchanged from the month before, but still well above the Fed’s long-term two-percent target. Diane Swonk, chief economist at KPMG, said inflation had “forced the Fed’s hand.” “Price pressures remain too elevated and too persistent for policymakers to look through, while the economy and labor market have held up well enough to absorb tighter policy,” she said.

In its SEP, the Fed raised its forecast for its preferred gauge of inflation — the Personal Consumption Expenditures (PCE) price index — by 0.1 percentage points to 3.7 percent by year-end. The Fed also raised its projection for GDP growth by year-end to 2.3 percent, up 0.1 percentage points. Warsh reiterated his belief in the “resilience” of the US economy, citing its strength as being a marker of its ability to absorb tighter financial conditions.

**- ‘Rather unfortunate’ -** US stock markets largely priced in Wednesday’s rate hike, but they were still down on the news — expected with any rate hike as investors adjust their portfolios. Yields on 10-year US Treasury bonds — which have surged in recent days as uncertainty on long-term inflation has spiked — were also up past the five-percent threshold, a sign that uncertainty remains a factor. Warsh was named to his position after a contentious Senate confirmation process, during which Democratic lawmakers accused him of being a “sock puppet” for Trump, which he denied.

The Fed has a dual mandate to deliver maximum employment while keeping inflation to its long-term two-percent target. It mainly achieves these goals by setting the key US interest rate — lower rates tend to spur economic activity but fuel inflation, and hiking them cools both activity and prices. The Fed’s SEP showed that at least 12 of 18 policymakers who participated in the projection expected one more rate hike would be required before the end of the year. Four policymakers expect two more rate hikes to be required. Warsh has criticized the Fed’s policy of offering such projections in the past and did not participate in the previous iteration in June. This projection also included only 18 policymakers, suggesting he had once again withheld his contribution.

© 2024 AFP

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The Fed last raised rates in 2023, when the central bank was still battling post-pandemic inflation. Fed Chair Kevin Warsh will address a press conference following the announcement. The US economy has been dealing with years of higher-than-target inflation, and prices have surged in the wake of Trump’s war on Iran, his signature tariff policies, and the ongoing AI boom. The Fed has held rates steady since January, choosing to wait to gauge the effects of energy price shocks and to let the impact of tariffs on prices ripple through the economy. At its last meeting in July, however, a quarter of the committee’s voting members dissented from the decision to hold pat, calling for an immediate hike.

Since then, other policymakers — including Warsh — had hinted that if inflation did not meaningfully slow, the Fed may need to intervene. On Friday, August’s consumer price index came in at 3.4 percent — unchanged from the month before, but still well above the Fed’s long-term two-percent target. In its SEP, the Fed raised its forecast for its preferred gauge of inflation — the Personal Consumption Expenditures (PCE) price index — by 0.1 percentage points to 3.7 percent by year-end. Inflation “has spread across the economy and is becoming embedded in consumer and firm behavior — exactly what the Fed must prevent,” said Diane Swonk, chief economist at KPMG, in a note before the Fed’s decision was announced. The Fed also raised its projection for GDP growth by year-end to 2.3 percent, up 0.1 percentage point.

– Political implications –

Markets, which had largely priced in Wednesday’s rate hike, welcomed the decision without showing much movement on Wall Street’s main indexes. Yields on 10-year US Treasury bonds — which have surged in recent days as uncertainty on long-term inflation has spiked — were also little changed. The fresh hike will be sure to anger Trump, who has launched an unprecedented campaign to pressure the independent central bank to lower rates in order to spur economic activity. The Trump administration launched a criminal probe against Warsh’s predecessor Jerome Powell — whom the president regularly insulted and berated — and is still trying to fire Fed Governor Lisa Cook.

On Tuesday, key Trump economic advisor Kevin Hassett advocated against a rate hike but said the White House would “understand and respect the decision.” Warsh was named to his position after a contentious Senate confirmation process, where Democratic lawmakers accused him of being a “sock puppet” for Trump, which he denied. So far, Trump has supported Warsh, claiming that the Fed chair wants lower rates and accusing the board of being “political.” The Fed has a dual mandate to deliver maximum employment while keeping inflation to its long-term two-percent target. It mainly achieves these goals by setting the key US interest rate — lower rates tend to spur economic activity but fuel inflation, and hiking them cools both activity and prices.

The Fed’s SEP showed that at least 12 of 18 policymakers who participated in the projection expected one more rate hike would be required before the end of the year. Four policymakers expect two more rate hikes to be required. Warsh has criticized the Fed’s policy of offering such projections in the past and did not participate in the previous iteration in June. This projection also included only 18 policymakers, suggesting he had once again withheld his contribution.

– Asad HASHIM and Myriam LEMETAYER

© 2024 AFP

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