Key Points
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The Federal Reserve is expected to keep interest rates steady at its meeting this week.
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Inflation was high in September, increasing the chance that interest rates will be hiked.
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An unexpected interest rate rise could impact the market negatively.
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There are several important events happening this week for the markets, including earnings reports from Amazon and Microsoft and a highly anticipated Federal Reserve meeting. The Federal Reserve raised interest rates for the first time in three years at the September meeting, but Chairman Kevin Warsh’s new policy not to provide forward guidance means the market doesn’t have any clear direction about what will happen at this meeting.
The meeting happens on Oct. 28. Here’s what to expect, and how the markets could react.
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Are interest rates going up?
The Federal Reserve raised the target federal funds rate by a quarter of a percentage point in September, to 3.75% to 4%. It noted that despite high inflation, consumer spending remained strong and the unemployment rate was low. Its goal is to help steer the inflation rate closer to 2%.
While Warsh didn’t provide forward guidance, other Federal Open Market Committee (FOMC) members signaled that there would likely be another rise this year, at the December meeting, not the October meeting. CME FedWatch tracks interest rate probabilities based on trading activity, and it’s projecting a 90.6% chance that the rate stays put.
Image source: CME FedWatch.
However, the most recent inflation data might change that. The Consumer Price Index (CPI) increased 3.7% over last year in September, indicating that the recent hike isn’t yet achieving its goal. The war with Iran and the unabating artificial intelligence (AI) build-out are stifling efforts to bring it down.
This is where Warsh’s decision not to provide forward guidance could come in handy, as there is a chance he will raise rates this week. In the meantime, people have already figured in no rate change to their financial activities.
The meeting could go several ways
If the meeting goes as expected and the Fed keeps interest rates steady, there could be minimal market reaction, though the market could respond positively.
If Warsh hikes rates again, there could be a swift, negative reaction. Higher rates are meant to deflate the economy, which is crucial for long-term health. But a stagnating economy isn’t great for businesses or stocks, and it could severely impact all the AI companies borrowing money to keep building. The S&P 500 (SNPINDEX: ^GSPC) fell in September when the first increase was announced, and if there’s another this week, the response could be more drastic, both because the rate would be higher and because it would be unexpected.
In any case, further forward guidance or lack thereof could also send the market down.
What investors should do
As always, investors should focus on strong businesses with long-term opportunities that can withstand short-term volatility. A company that could be in real trouble due to interest rate hikes may not be the kind you want in your portfolio.
Continue investing, and if the market does drop, whether this week, after the December meeting, or at any other time, use the opportunity to buy bargain stocks.
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Jennifer Saibil has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Amazon and Microsoft. The Motley Fool has a disclosure policy.
