Fed Faced with Trump’s Price Hikes, Shrinking Paychecks at Last Meeting Before Midterms
Fed Faced with Trump’s Price Hikes, Shrinking Paychecks at Last Meeting Before Midterms
Central bank holds rates while Americans head to the polls amidst painful price hikes at the gas pump and the grocery store
Today, the Federal Reserve held the federal funds rate steady at 3.75% to 4.00%. The 10-to-2 decision follows September’s rate hike, the first since July 2023. Today’s decision comes less than a week before the midterm elections, as Americans continue to bear the costs of Trump’s chaotic policies. Annual inflation is at 3.7%, the highest rate since May, and pay raises have trailed inflation for six straight months. His war in Iran has driven gas prices to $4.25 per gallon, up nearly 40% from a year ago and the highest-ever level heading into an election. His tariffs continue to raise prices for imported and even domestic goods, while refunds for illegal tariffs have padded corporate bottom lines.
The Fed raised interest rates in September to respond to rising prices, but today’s decision to hold rates at high levels provides little comfort for households who need immediate relief. Families are facing more expensive mortgages, car loans, and other borrowing on top of higher prices. Trump promised to lower prices, but families are heading into the midterms with higher prices, more expensive credit, and fewer opportunities to get ahead.
Groundwork’s Chief Economist Breyon Williams shared his reaction:
“Working families hoping for relief from Trump’s high prices are running out of options. Americans are being forced to take on debt just to make ends meet as wage growth stalls and working families’ purchasing power shrivels. As long as the president continues to pursue his war in Iran and his sloppy tariff regime, prices will continue to climb with no end in sight.”
BACKGROUND
Trump’s tariffs and war in Iran are driving up prices as families struggle to keep up with rising costs.
- Inflation remains well above the Fed’s target. September’s Consumer Price Index (CPI) rose 3.7% over the past year, the highest annual rate since May. Tomorrow’s Personal Consumption Expenditures (PCE) report is forecasted to show headline inflation at 3.6% in September, and October PCE inflation is currently forecast at 3.7%.
- More inflation is on the way. Wholesale prices rose 1.3% in September alone and are up 6.3% from a year ago, the highest since December 2022. The Fed’s own Beige Book reports that firms expect that prices will increase in the months ahead, with businesses across the country reporting ongoing pressure from energy spikes and tariffs, with some planning further price increases as they renegotiate contracts.
- Consumers see no end to high prices. The University of Michigan’s October consumer sentiment survey found that consumers expect prices to rise 4.7% over the next year, up from 4.6% in September. The Conference Board’s Consumer Confidence Survey reported similar findings yesterday; consumers expect 5.8% inflation over the next year and higher interest rates ahead.
- High interest rates mean families face higher borrowing costs amid rising prices. Mortgage rates and new car loans are above 7%, with the average 30-year fixed mortgage reaching its highest level since November 2023, and consumers are paying an average of 22.4% interest on credit card balances.
- A new report from The Century Foundation and Protect Borrowers found that required debt payments have grown 14.8% since the end of 2022, more than eight times as fast as real take-home pay. This means that the typical worker’s debt burden is “eating up 52 cents of every dollar they’ve gained in income.”
Weak hiring and corporate layoffs are putting pressure on the labor market.
- The Fed’s decision comes as the labor market shows signs of losing momentum. The economy added just 29,000 jobs in September, while the unemployment rate ticked up from 4.1% to 4.2%. The Bureau of Labor Statistics also revised July and August’s combined job gains downward by 60,000.
- Weak labor demand has put a damper on raises. Wage growth is 3%, the weakest since 2021 and well below price growth.
- Businesses are responding to higher borrowing costs by slowing hiring. According to the October Dallas Fed Manufacturing Index, 42% of Texas businesses facing higher credit costs have reduced or delayed hiring, or plan to do so.
- Companies are also announcing substantial workforce reductions. Microsoft disclosed on Monday that it will buy out 60,000 workers, Ebay plans to cut 9% of its staff, and American Express will lay off 5% of its workers.
