Markets Edge Higher, Fed Expected to Hold Rates Steady Ahead of Midterms

The S&P 500 and Nasdaq Composite opened in positive territory Tuesday, while the Dow Jones Industrial Average slipped marginally, as easing oil prices buoyed risk appetite ahead of a busy week of corporate earnings and the Federal Reserve’s policy announcement.

The S&P 500 rose 22.7 points, or 0.3%, to 7,699.47 at the open, and the Nasdaq added 116.9 points, or 0.45%, to 26,286.306, according to Reuters. The Dow fell 84.1 points, or 0.16%, to 52,277.49. Gold prices edged higher for a second session as markets braced for the Fed decision, while the U.S. dollar held its gains.

**Fed Expected to Hold Steady**

The Federal Open Market Committee’s two-day meeting concludes Wednesday, and markets are pricing in better than a 90% probability that the Fed will leave its policy rate unchanged in a range of 3.75% to 4%, based on CME Group’s FedWatch tool. The meeting, the fourth of Chair Kevin Warsh’s tenure, comes just six days before Americans vote in midterm elections that will determine control of Congress.

Multiple policymakers have signaled little urgency to act now. Fed Vice Chair for Supervision Michelle Bowman said Oct. 14 that “we have some time to wait and see how financial conditions evolve before we take more action,” according to NBC News. San Francisco Fed President Mary Daly said in a recent interview, “I don’t feel urgent that we have to decide with a limited set of information. I think we have the time that we need.”

Vice Chair Philip Jefferson pointed to the jump in longer-term borrowing costs, adding that “my colleagues and I will need to come to our own judgment, which may take more time,” as reported by Euronews. New York Fed President John Williams likewise said “there is no need for urgency.”

The central bank also has a long tradition of staying out of politics. Raising rates days before an election could risk appearing politically motivated. “The Fed doesn’t want to poke the White House in the eye six days before an election,” Joseph LaVorgna, chief economist at SMBC’s U.S. arm and a former Trump administration official, told Euronews. Analysts at Deutsche Bank wrote, according to NBC News, that “we could imagine that all else equal the Fed might prefer to stay out of the headlines for raising rates just ahead of a midterm election where affordability is the principal concern.”

**Inflation Still the Core Worry**

Despite the expected pause, inflation remains well above the Fed’s 2% target. The September consumer price index rose 0.6% from the previous month and 3.7% from a year earlier, up from 3.4% in August. The Fed’s preferred inflation gauge, the personal consumption expenditures price index, is expected to show a 3.6% annual increase in September when it is released Thursday, compared with 3.4% in August, according to NDTV Profit.

Chicago Fed President Austan Goolsbee called the September CPI reading “discouraging” and said underlying inflation at today’s level was “not acceptable,” Euronews reported. Petrol prices, which have topped $4 a gallon for three months, accounted for more than half of September’s price increase. Diesel hit a record $6.53 a gallon in late September. Brent crude, the global benchmark, fell over 6% on Monday to around $110.8 a barrel, still far above the $72 level before the Iran war began in late February, according to Euronews.

The stubborn inflation data has strengthened the case for a December hike. The CME FedWatch tool showed a 75.1% probability of a quarter-point increase at the Dec. 8-9 meeting, Fox Business reported. “The Federal Reserve will definitely hike interest rates again, probably in December,” Heather Long, chief economist at Navy Federal Credit Union, told Fox Business. “The big question is how many more times do they have to hike after that?”

**Dissent Possible as Divisions Surface**

The decision may not be unanimous. Cleveland Fed President Beth Hammack and Dallas Fed President Lorie Logan, who have both said rates are not yet high enough to cool inflation, could vote for a hike, Euronews reported. As many as three officials could dissent, while NDTV Profit noted that Reuters reported at least one dissent is expected.

The hold would follow September’s quarter-point increase, the first rate hike in three years. Warsh said at the time, “The plain fact is that inflation is too high and has been for too long,” according to NBC News.

**Economy Remains Resilient**

The real economy is showing mixed signals. The U.S. grew at an annualized 2.2% in the second quarter, and the Atlanta Fed’s GDPNow tracker indicates 3.5% growth for the third quarter. However, employers added only 29,000 jobs in September, and the unemployment rate rose to 4.2%. Wage growth has trailed inflation over the past six months, suggesting labor costs are not adding significantly to price pressures.

Borrowing costs are biting. The average 30-year U.S. mortgage rate hit 7.4% in early October, a three-year peak, before easing to 7.32% last week. Research firm Oxford Economics estimated this year’s rise has priced 5 million more American households out of buying a home, Euronews reported. The U.S. dollar remains near an 18-month high against major currencies.

**Political Undercurrents**

Inflation is a central issue in the midterm elections, with voters blaming President Donald Trump’s trade policies and the war with Iran for higher prices. An NBC News poll found Trump’s approval rating at just 27% for his handling of the cost of living. Two-thirds of Americans said soaring gas prices triggered by the Iran war were a serious problem, and more than half said current economic conditions had changed their grocery-buying habits.

White House National Economic Council Director Kevin Hassett called the September inflation reading “a disappointing number” and acknowledged that the administration is “noodling” over why voters have negative views of the economy despite higher spending, NBC News reported.

**Warsh’s Words in Focus**

All eyes will be on Chair Warsh’s post-meeting press conference at 19:30 CET for clues about the December meeting. Warsh has avoided forward guidance, saying in Bangkok earlier this month, “I don’t prejudge meetings.” If he emphasizes that inflation must return to the 2% target faster, investors are likely to read that as confirmation of a December hike, Euronews reported.

Warsh’s independence has also come under scrutiny. PBS reported that his tenure has been marked by questions about his independence from Trump, who appointed him. Trump created a three-person committee to recommend whether he has cause to fire Fed Governor Lisa Cook over mortgage fraud allegations she denies, Euronews noted. Cook is expected to appear before the committee next week.

Thursday brings the Commerce Department’s first estimate of third-quarter gross domestic product and the September PCE price index, giving markets the next hard data points to assess whether the economy can sustain higher rates. For now, the central bank appears to have settled on a pause — but with inflation running hot and growth holding up, the respite may be brief.