Midterm elections curbed US rate hike
The Al-Shal report highlighted the decision by the U.S. Federal Reserve to raise the benchmark interest rate on the U.S. dollar by a quarter of a percentage point, bringing it to a range of 3.75%–4.00%. The rationale for the rate hike stems from heightened concerns over inflationary pressures. The official U.S. Bureau of Labor Statistics reported in its latest data that the Consumer Price Index (CPI) for urban areas rose by approximately 0.4% in August, compared with a 0.1% increase in July, bringing the overall level for goods and services to 3.4%. The largest contributor to this increase was the politically sensitive gasoline price index, which rose by about 3.9%, along with a broader fuel price index that increased by approximately 2.1%.
The decision to raise interest rates is a professional one and undoubtedly warranted, but it is unpopular with the U.S. administration. President Trump has called for rates of 1% or even lower. Its unpopularity has grown because it came less than two months before the midterm elections for the House of Representatives and the Senate, potentially affecting the outcomes negatively for the Republicans.
Conversely, inflationary pressures have been politically manufactured. The failure to resolve the regional conflict between the United States and Iran and its impact on higher oil prices, the tariff war, and the U.S. national debt surpassing the $40 trillion mark are among the primary drivers of rising inflation levels or concerns about their consequences, despite the economy’s solid performance and labor market stability. We believe the U.S. Federal Reserve may have needed to raise interest rates by a larger margin, but it chose otherwise due to the sensitivity of domestic political conditions and to avoid accusations of bias toward any party in the upcoming midterm elections.
Unless there is a major breakthrough in the Strait of Hormuz crisis and a halt to the tariff war—particularly with Canada—the U.S. Federal Reserve may face a critical situation at its next meeting in late October, or days before the November 3 midterm elections, when it may have no option but to continue raising interest rates.
