Oil Pullback Lifts Stocks as Fed Poised to Hold Rates Ahead of Midterms

U.S. stock indexes rose and oil fell Tuesday as markets focused on the Federal Reserve’s two-day meeting that will conclude Wednesday with an interest rate decision that is all but certain to be a pause in the tightening cycle.

The S&P 500 gained 0.3% to 7,699.47 at the open, while the Nasdaq Composite rose 0.45% to 26,286.306, according to Reuters. The Dow Jones Industrial Average slipped 0.16% to 52,277.49. The equity rally was supported by a pullback in oil: Brent crude fell more than 6% on Monday from its highest close since March, settling near $110.8 a barrel on Tuesday, down from $117.40, as diplomatic efforts around the U.S.-Iran conflict appeared to pick up pace. Gold edged higher amid the uncertainty, while the U.S. dollar held gains ahead of the decision.

**Fed Expected to Hold**

The Federal Open Market Committee is widely expected to leave the federal funds rate unchanged at 3.75% to 4% when it announces its decision at 19:00 CET (2 p.m. ET) Wednesday, according to multiple reports. Financial markets were pricing in a more than 90% probability of no move, based on CME Group’s FedWatch tool, which tracks interest rate futures.

The anticipated pause comes despite persistent inflation. The September consumer price index rose 3.7% from a year earlier, up from 3.4% in August and well above the central bank’s 2% target. Core CPI, which strips out food and energy, increased 2.6%, while wholesale prices jumped 6.3%. The personal consumption expenditures price index, the Fed’s preferred gauge, is expected to show a 3.6% year-on-year rise for September when data is released Thursday—one day after the decision.

Gasoline, which has topped $4 a gallon for three months, accounted for more than half of September’s CPI increase, the Labor Department said. Diesel hit a record $6.53 a gallon in late September, raising shipping costs across the economy.

**Politics and Patience**

Several factors argue against a rate hike this week. The Fed has a tradition of avoiding major policy moves close to elections. “The Fed doesn’t want to poke the White House in the eye six days before an election,” Joseph LaVorgna, chief economist at SMBC Nikko Securities America and a former Trump administration official, told Euronews. Deutsche Bank analysts echoed that view, writing 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,” as reported by NBC News.

Fed officials have also signaled patience. “I don’t feel urgent that we have to decide with a limited set of information,” San Francisco Fed President Mary Daly said in a recent interview, according to NBC News. 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,” Euronews reported. New York Fed President John Williams said there is “no need for urgency.”

**Dissents Possible**

Not all policymakers may agree. Cleveland Fed President Beth Hammack and Dallas Fed President Lorie Logan have both said rates are not yet high enough to cool inflation and could vote for an increase, according to Euronews. As many as three officials could dissent. The Fed last raised rates by a quarter-point in September, the first hike in three years.

“The case for skipping [a rate hike in] October is not terribly compelling,” Deutsche Bank analysts wrote, per NBC News. Heather Long, chief economist at Navy Federal Credit Union, told Fox Business that “this hotter than expected inflation data did increase the chance of an October rate hike, but it’s a very high bar to increase in October, they would do it within a week of the election.”

**December in Focus**

Fed Chair Kevin Warsh’s post-meeting press conference at 19:30 CET will be closely watched for clues about December. Markets see a 73% to 75% probability of a quarter-point hike at the Dec. 8-9 meeting, according to CME FedWatch data cited across sources. Economists polled by Reuters expect at least two more rate hikes, BMO Chief U.S. Economist Scott Anderson said.

Warsh, appointed by President Donald Trump earlier this year, has offered few hints. Speaking in Bangkok at the IMF and World Bank annual meetings, he said the world had “broadly conformed to our expectations” since September and stressed that “at the Federal Reserve, we made very clear that we would deliver price stability,” Euronews reported. He has long opposed forward guidance—signaling future moves to markets—and has avoided it.

Aditya Bhave, head of U.S. economics research at Bank of America, said a surprise hike could “end forward guidance by showing markets that they can’t listen to the guidance anymore,” though most economists consider a hike this week unlikely, Euronews noted.

**Economy Holds Up**

The economy remains resilient despite higher borrowing costs. Employers added just 29,000 jobs in September and the unemployment rate rose to 4.2%, yet the economy grew at an annualized rate of 2.2% in the second quarter. The Atlanta Fed’s GDPNow tracker points to 3.5% for the third quarter, and the government’s first estimate of Q3 growth is due Thursday, just after the Fed decision. The average 30-year mortgage rate hit 7.4% in early October, a three-year high, before easing slightly to 7.32% last week. Oxford Economics estimates that this year’s rise in mortgage rates has priced 5 million more American households out of buying a home, according to Euronews.

If Warsh focuses on the need to return inflation to 2% faster, investors will likely read that as confirmation for a December hike, analysts said.