What we're covering here
- Pause after last month’s hike? The Federal Reserve is widely expected to hold its benchmark interest rate steady this month after raising rates in September for the first time since 2023.
- Still-stubborn inflation: The war with Iran continues to push up energy prices, with higher costs starting to spread to other goods and services. That’s complicating the picture for Fed officials as they balance the impact of persistently higher inflation with higher borrowing costs on already-stretched consumers.
- Fed independence under scrutiny: The decision comes less than a week before the US midterm elections. President Donald Trump has repeatedly called for lower rates, pressuring a central bank whose rate decisions are guided by economic conditions, not political demands.
- What comes next? Investors will be looking for clues from Fed Chairman Kevin Warsh about whether another rate hike is likely in December. Officials signaled last month that they may raise rates again this year.
Updates
(4)Stocks haven’t loved Fed rate decisions this year
The S&P 500 hasn’t closed in the green on a Federal Reserve interest rate decision day since the last time the central bank cut rates, which was December 2025.
January marked the start of five meetings with the Fed holding rates steady before the central bank raised rates in September for the first time since 2023. Those rate decision days saw the S&P 500 fluctuate during trading before closing lower.
Markets can be volatile around a Fed rate decision, as traders parse the central bank’s decision; the published statement; remarks from the chairman; and, four times a year, a set of economic projections.
The VIX index, which tracks expectations for volatility, has climbed on each Fed rate decision day this year. The action-packed part of the trading day is after 2 p.m. ET, when traders get the decision followed by a press conference held by the Fed chairman.
On the day of the July Fed rate decision, the S&P 500 briefly rose 0.3% before sliding into the red and dropping 1.52% by the closing bell. The VIX surged 13%, and the 30-year Treasury yield hit its highest level since 2007.
With the Fed holding rates steady or raising rates, it can spook stock market traders. Higher-for-longer rates raise borrowing costs and slow economic activity, dampening the outlook for stocks. Higher rates can also make bonds more appealing for investors, which can pull them away from stocks.
There’s also the Warsh factor, and how markets react to the Fed chairman’s messaging.
Despite having a rough set of Fed days, the S&P 500 is up 13% this year. The AI boom, strong company profits and resilient consumer spending are boosting the stock market.
What to expect from the Fed today
The Federal Reserve is widely expected to keep interest rates steady on Wednesday, even as officials weigh another hike this year to tame rising inflation.
Central bankers have struggled to tame inflation for years. But gas and energy prices have been on an upward climb since the war in Iran began, and came in hotter than expected in September.
Still, the Fed’s moves may only do so much. Tweaking interest rates can’t bring down gas prices, for example. Rates are designed to slow or stimulate the economy broadly and without targeting individual industries.
At his 2:30 p.m. press conference, Fed Chairman Kevin Warsh is likely to face questions on the Fed’s next move. His answers may be brief: Warsh has come out strong against any “forward guidance,” which was used for years to tee up future decisions.
Warsh may also face questions as to whether the Fed held off on a hike because of political pressure just days before the midterm elections.
Fed leaders defend their independence. Meanwhile, President Donald Trump has repeatedly attacked the central bank for not lowering rates, and his approval rating has tanked over cost-of-living issues.
The Fed isn't the only central bank making a decision this week
The sharp rise in energy prices stemming from the war with Iran has quickly translated into high prices for consumers across the globe and raised the prospect of inflation becoming more entrenched. But central banks’ responses have varied significantly.
In the United States, the Federal Reserve hiked interest rates last month for the first time in three years. It was a reversal from last year, when it cut rates three times.
The European Central Bank, Bank of Japan and Reserve Bank of Australia moved to raise borrowing costs last month, too. However, all three central banks began hiking rates earlier in the year.
The Bank of England, meanwhile, has yet to hike rates this year, but officials have said recently that the need to counteract inflation has grown, boosting the case for a rate hike.
What the Fed knows about the economy — and what it's about to find out
Heading into this week’s monetary policy meeting, central bankers are armed with a slew of data that paint a mixed picture of the economy.
On the labor market side of the equation, things are looking relatively solid. While the unemployment rate ticked up to 4.2% in September from 4.1% the prior month, it’s been mostly flat for the past year. The number of new hires, however, tumbled last month to 29,000 from August’s 133,000 job gains. Still, monthly hiring has on average been stronger for the first nine months of this year compared to last.
Inflation has been much more of the “problem child.” Overall, prices rose 0.6% in September from the month before, bringing the annual rate of inflation to 3.7% from 3.4% in August, according to the latest Consumer Price Index report. And price increases are spreading to other goods and services.
From a bird’s-eye view, the economy looks mostly strong. Second-quarter gross domestic product came in at an annual rate of 2.2%, a much more robust pace than the government initially estimated. Much of that growth is connected to AI-related spending.
But two prized pieces of data are set to come out just one day after the Fed’s two-day meeting this week: the Personal Consumption Expenditures price index, the central bank’s preferred inflation gauge; and an initial read of third-quarter GDP.
