Fed Holds Steady: War Inflation Keeps Borrowing Costs High

The Federal Reserve maintained its target interest rate range at 3.75% to 4% during its October meeting. The decision comes as rising energy prices from the conflict with Iran threaten to keep inflation elevated while squeezing household budgets.

Chairman Kevin Warsh and the Federal Open Market Committee chose to hold rates steady to allow more time to assess economic fallout. This pause offers a window for policymakers to evaluate whether a rate increase is necessary at the December meeting to bring inflation down to the 2% target.

Mark Zandi, chief economist at Moody's Analytics, stated that the war has cost the average American household approximately $2,000 to date. He attributed this financial hit primarily to higher energy costs and increased interest rates.

Zandi noted a widening gap in consumer behavior. He observed that high-net-worth individuals are spending freely due to gains in AI stocks. Conversely, lower and middle-income consumers are facing falling real wages and high rates, leading to more cautious spending habits.

The steady benchmark rate means consumers are unlikely to see immediate relief on borrowing costs. Credit card interest rates track the prime rate, which usually sits three percentage points above the Fed’s benchmark. Because most cards carry variable rates, any changes in the federal funds rate typically pass through to borrowers within one to two billing cycles.

Matt Schulz, LendingTree’s chief consumer finance analyst, reported that average credit card rates have risen for three consecutive months. He said these rates are now at their highest levels since December 2025. Schulz added that further increases are likely in the coming months as issuers implement the September rate hike.

Long-term borrowing costs remain elevated due to inflation expectations. Thirty-year fixed mortgage rates have stayed above 7% for more than a month. Jeff DerGurahian, LoanDepot’s chief investment officer, explained that mortgage rates track long-term Treasury yields rather than the Fed’s benchmark directly. He cited cooler oil prices and softer consumer spending as necessary factors to lower these rates.

President Donald Trump signed an executive order aimed at reducing some mortgage costs. The move responds to growing concerns that high interest rates and inflation are making homeownership less affordable for many Americans.

Auto loan rates have remained flat at the 7% threshold for new cars throughout the year, according to Joseph Yoon, a senior analyst at Edmunds. He noted that any temporary rate drops in the fourth quarter are usually due to year-end financing offers from dealers. These subsidized rates are generally reserved for buyers with top-tier credit, while used car rates remain above 10%.

Federal student loan rates for new borrowers range from 6.52% to 9.07% based on recent Treasury auctions. President Trump said he might support legislation to cap these rates in the future. A bill to do so, introduced by Reps. Jared Moskowitz, Mike Lawler, and Anna Paulina Luna, is currently in committee.