Investors brace for possible rate hike at uncertain Fed meeting

Investors are preparing for a potential interest rate hike during the upcoming Federal Reserve meeting, with uncertainty surrounding whether the central bank will raise rates at the conclusion of their two-day session on Wednesday. Inflation has consistently been above the Fed's 2% target, and rate increases are the primary method used to combat rising prices. Following Kevin Warsh's hawkish speech last month, speculation has increased that the Fed will act.

However, some investors remain skeptical that the central bank, which has kept rates unchanged so far in 2026, will take this step. Alicia Levine, chief investment officer at BNY Wealth, notes that this meeting is a rare one where the outcome could go either way. Higher interest rates could negatively impact stocks by increasing borrowing costs and potentially reducing equity valuations due to competition from bonds.

The S&P 500 has risen approximately 11% so far in 2026, driven by strong corporate earnings fueled by AI infrastructure spending. However, the index has recently slipped 2.7% below its mid-August peak. Bond market selling has pushed U.S. Treasury yields to multi-year highs, with the 10-year yield nearing a 5% level that could further challenge stocks.

Investors are also concerned about escalating tensions between the U.S. and Iran, which have driven oil prices above $100 a barrel. Currently, Fed funds futures indicate a roughly 70% probability that the central bank will raise its rate by a quarter-percentage point at the meeting, according to LSEG data. However, these odds have fluctuated over time as traders respond to economic data and Fed officials' comments.

Strong job growth in the latest employment report has supported the likelihood of a rate hike, while the core Personal Consumption Expenditures Price Index, a key inflation gauge used by Fed officials, came in at 3.3% annually last month, indicating persistent inflation above the target. If the Fed does not raise rates, it could present an opportunity to take profits from the market, as Levine suggests.

Conversely, if the Fed does hike, investors will be looking for indications of whether it is a one-time move or the beginning of a series of rate increases.