FINANCE EXPERT WEIGHS IN ON FED'S DILEMMA DAYS BEFORE MIDTERM ELECTIONS

The following information was released by the Virginia Tech:

By

Jacob Levin

21 Oct 2026

Just days before the 2026 midterm election, the Federal Reserve will be faced with a high-stakes decision raise interest rates to curb inflation or hold steady. According to Virginia Tech finance expert Brad Paye, politics are sure to be an elephant in the room when the Federal Open Market Committee meets Oct. 27-28.

"This Fed meeting boils down to an awkward situation," Paye said. "Fundamentals suggest a rate increase may be needed, but the optics and political considerations five days before an election may lead the Fed to wait."

However, the decision could impact consumers and their wallets.

"The financial impact on consumers depends entirely on the type of debt they carry," Paye said. "It can be an immediate cost increase for variable-rate debt like credit cards and HELOCs. Long-term rates are driven by longer-term inflation and growth expectations. If a Fed rate hike convinces the market that inflation is being tackled, mortgage and car loan rates can actually stay relatively stable."

According to Paye, if the Fed were perceived as a politically leaning institution, it could be a threat to the central bank's viability. The Fed operates as an independent government agency under authority granted by Congress, meaning the decisions are intended to remain nonpartisan and free from influence by Congress or the president. This means that the institution should remain nonpartisan and decisions they make regarding the monetary policy of the United States are not impacted by the president or Congress.

"The Fed cares deeply about not leaning on the political scales," Paye said. "If the public believes they've taken a political side, it poses a major threat to their autonomy and authority granted by Congress."

He noted that this is not the first time the Fed has faced an interest rate decision close to an election. The central bank changed its rate target in the run-up to the 2022 midterm elections and 2024 Presidential election.

"In 2024, the Fed lowered rates shortly before the presidential election. Perhaps most comparably to the current scenario, the Fed raised the target in a decision close to the midterm elections in 2022," Paye said. "In 2022, the inflation rate at that time was around 7% much higher than the current rate and arguably the Fed did not have the luxury of being able to defer a rate increase in that case."

Paye added that Consumer Price Index data released on Wednesday, Oct. 14, will significantly influence the decision to raise rates or hold steady.

"The data came in a bit high, but perhaps not so high that an increase is now certain," he said. "Textbook economics would suggest a rate hike. However, with the midterm election only five days after the decision, it could cause disagreement within the FOMC on whether to prioritize economic fundamentals or avoid political perception."

For voters, however, the Fed decision might not be the most important factor when deciding who to vote for on Nov. 3.

"I'm not so sure the voters are going to change the way they vote depending on what the Fed does here," Paye said. "I think many voters have already decided. For those still undecided, their choice will likely hinge on how much they believe the administration contributed to inflation."

About Paye

Brad Paye is an associate professor in the Department of Finance, Insurance, and Business Law in the Pamplin College of Business. His research interests center on asset pricing and interactions between financial markets and macroeconomic conditions. His broader academic interests include volatility modeling, forecasting, econometrics, and the interdisciplinary field of neurofinance.