Why the Fed Could Shake Up the Midterm Elections

The Federal Reserve — the group that controls interest rates in the United States — may be about to make a move that could change the political landscape before the midterm elections. Many traders and economists now think the Fed will raise interest rates, which would make it more expensive to borrow money for things like homes and businesses. This decision could anger President Trump, who has been publicly asking for rate cuts for months. A big report on inflation is expected Thursday, and it could push the Fed closer to that choice.

The S&P 500, a key measure of how the stock market is doing, has had a rough month. Traders are nervous ahead of Thursday's release of the Personal Consumption Expenditures (PCE) price index, which is one of the main tools the Fed uses to track inflation. Most economists think the report will show inflation at a three-year high, meaning prices have been rising fast for a long time. That kind of news usually puts pressure on the Fed to act.

There is some good news mixed in. Oil prices have dropped because of peace talks to end the war in Iran. Brent crude oil, which is used as a global price marker, was trading at about $75.50 a barrel — just a bit above what it cost before the war started. Lower oil prices can help slow inflation, which would be a relief for many Americans.

But borrowing costs are still high. The yield on the 10-year Treasury note — a number that affects mortgage rates and business loans — was at 4.48 percent. Government bonds have also lost value since the war began. First, investors worried about wartime inflation. Now, they are concerned that the Fed will raise rates even further.

Several major banks think rate hikes are coming. Economists at BNP Paribas, Deutsche Bank, and Bank of America all believe the Fed will raise rates. Aditya Bhave, an economist at Bank of America, said the Fed could raise rates three times this year, starting in September. He wrote in a report that the Fed's inflation problem has gotten unambiguously worse. Not everyone agrees, though — analysts at UBS say the market's expectations of rate hikes are too aggressive and that the Fed may hold steady for now.

The timing of a rate hike could cause political problems. The Fed is supposed to be independent from politics, but its decisions still affect elections. The Fed cut rates in September 2024, which drew sharp criticism from Kevin Warsh, who now leads the central bank, and from President Trump, who accused the Fed of playing politics. If the Fed raises rates before the midterms, it could hurt Trump's approval ratings even more, since many voters already feel unhappy about the economy.

Meanwhile, big changes are happening in New York politics. Candidates backed by New York City Mayor Zohran Mamdani won several tight congressional primary races. These candidates are democratic socialists, meaning they support major changes to the economy and are skeptical of big business. Their wins stunned many people on Wall Street, who are now asking what this means for taxes and business policy.

Super PACs, which are groups that spend large amounts of money to influence elections, spent over $50 million on the New York primaries. One pro-artificial intelligence super PAC, backed by Trump donors, spent $8 million to defeat Alex Bores, a state lawmaker who helped pass one of the first AI safety laws in the country. Bores lost his race. The fight over AI regulation is becoming a major battleground in elections across the country.

Mark Zuckerberg's company Meta is reportedly building a new prediction app called Arena. Users would likely bet with points rather than real money, at least at first. The amount of money wagered on prediction market sites has already more than doubled this year, reaching $130 billion. Meta has faced many challenges from regulators and has been building new products instead of buying competitors.

Tech billionaire Larry Ellison, worth an estimated $219 billion, has given tens of millions of dollars to support President Trump. His company Oracle was chosen as a key partner in a $500 billion government plan to build data centers. When Ellison showed up at the White House without an ID, Trump personally told security to let him in, saying everyone knows who Larry is.