Traders are giving the Fed more than a 90% chance of a 0.25 percentage-point rate hike, according to the CME Group’s FedWatch tool. If the hike happens, the federal funds target range would move to 3.75%-4%. Wall Street now expects the Federal Reserve to raise interest rates on Wednesday.
Crude oil has moved back above $100 a barrel as the Iran conflict affects the market. Past rate-hike cycles show that the S&P 500 often struggles at first and then recovers. HSBC said the S&P 500 typically dips initially during rate-hike cycles before gradually recovering. In smaller rate-normalisation cycles such as 1997 and 2016, stock-market performance generally improved around three to six months after the first hike. The S&P 500 has fallen on each of the five Fed decision days in 2026, with an average decline of about 1.5% on those sessions. Markets are strongly expecting a 0.25 percentage-point rate increase. Federal funds futures are pricing in about a 90% chance of a quarter-point hike, according to the CME FedWatch Tool.
Higher oil prices are creating another inflation problem for the Fed. More expensive oil can increase costs across the economy and make it harder for the Fed to bring inflation down. CNBC linked the recent rise in oil prices to additional pressure on the central bank to act. Investors will also closely watch the Fed’s new economic projections. Along with the rate decision, the central bank is updating its Summary of Economic Projections. The document will give fresh forecasts for inflation, unemployment and gross domestic product (GDP). The Federal Reserve’s projections also include the famous dot plot, which shows where Fed officials expect interest rates to go. Stocks could initially fall after the Fed raises rates. However, the bank does not expect that weakness to necessarily continue for a long period. HSBC head of Americas equity strategy Nicole Inui wrote this in a Tuesday note. HSBC’s analysis cited historical rate-hike cycles. The stock market has already had a difficult pattern on Fed decision days this year. Bespoke Investment Group highlighted the streak. The federal funds rate also influences savings rates, credit-card interest, personal loans and, to a lesser extent, mortgage rates. For savers, a higher Fed rate can eventually mean banks offer slightly better interest rates on deposits. However, the increase is usually gradual, and basic bank accounts may still offer very low returns.
HSBC expects another hike in December and said stocks may come under pressure at first.
Earlier reporting noted: Fed rate hike: Will your savings earn more while your debt costs more? Earlier reporting noted: The Fed’s interest-rate decision will affect more than just Wall Street and stock prices. The Federal Reserve is widely expected to raise interest rates on Wednesday, which would be its first rate hike in more than three years.
Morgan Stanley has also changed its forecast for Fed policy. Morgan Stanley expects one hike this week and another in December.
Morgan Stanley economists said the change was partly based on Warsh’s public comments, higher oil prices, inflation linked to artificial intelligence and the broader market shift toward expecting rate hikes. Morgan Stanley said the Fed could risk losing credibility if it does not raise rates. Michael Gapen, chief US economist at Morgan Stanley, said not hiking could increase concerns about the Fed’s credibility and push up longer-term risk premiums.
The bank previously expected no more rate hikes this year, but it now expects two hikes. Gapen made the comment in a Morgan Stanley note on Monday.
