The Federal Reserve is widely expected to keep interest rates unchanged this week, even as inflation climbs to 3.7% and American households continue to grapple with elevated living costs.

Much of the recent price pressure stems from the war the United States is waging against Iran, which has made energy more expensive. Still, the central bank raised rates just last month, and further hikes may be placing undue strain on an economy in which people are already feeling the brunt of higher borrowing costs. According to CME Group's FedWatch tool, investors now assign a probability of just under 10% to another quarter-point hike in October — a stark contrast to September, when officials lifted the benchmark interest rate to 3.75%-4%, the first such increase since 2023. A hold this week would leave the benchmark at that level for at least one more meeting.

The Fed has several reasons to wait before raising rates again

The latest inflation figures offer little comfort. The consumer price index rose 3.7% in September from a year earlier, leaving inflation considerably above the Fed's 2% target.

Oil has been one of the biggest challenges. Brent crude hit its highest level in five months on Friday before reversing some of its gains. Higher oil prices have also driven the increase in September's producer price index, which reflects the prices businesses receive for their goods.

Before the report's publication on Thursday, economists had expected the September inflation reading to come in at 3.6%, up from 3.4% in August, citing higher prices for flights, rents, computers, and gasoline as the main drivers.

The job market, however, tells a different story. Hourly wage growth has trailed inflation for six straight months — a significant development, since rapidly rising wages can prompt businesses to raise prices as well. That balance between prices and pay runs to the heart of the Fed's dual mandate for stable inflation and maximum employment.

Minutes from the Fed's September meeting also showed that several officials viewed the previous rate increase as a precaution against inflation becoming harder to control. If the Middle Eastern conflict subsides and energy supplies remain stable, some of that pricing pressure could evaporate even without further monetary policy tightening.

And there is Wall Street. Bond yields backed off last week at the tail end of a selloff in equities over worries about the demand for artificial intelligence and whether it will match up with the huge investment made in the sector. Fed Chairman Kevin Warsh has previously said that tight financial conditions may be enough to slow the economy, eliminating the necessity of higher interest rates.

Investors are not counting out an additional hike, though. Almost 75% expect another increase before 2026. This week's decision comes shortly before the US midterm elections, which will determine how political power is divided in Washington. From here, the story turns on variables already in motion: the next inflation readings, the path of oil, and whether tight financial conditions keep doing the tightening on their own — the scenario Warsh has described.

Borrowers could face expensive loans for longer while savers benefit

For those expecting cheap credit soon, any pause may offer little relief. Credit card rates are especially vulnerable to movements in the Federal Reserve's key interest rate because they carry floating rates. According to LendingTree, the average annual percentage rate on new credit card offers hovers at 23.96%. Savers sit on the other side of the same mechanic: the floating-rate link that keeps card APRs elevated is also what sustains the benefit to cash while the benchmark holds at 3.75%-4%.

Mortgages are an exception. They depend mostly on Treasury bond yields and the outlook for economic growth. With the yield on 10-year US Treasury bonds holding at 5%, the average 30-year fixed mortgage rate stands at 7.4%, according to Mortgage News Daily — a level that significantly raises the cost of buying real estate, especially where most of the purchase is financed by loans.