Federal funds futures data show that investors expect the Federal Reserve to raise rates by another 25 basis points on October 28, with the probability climbing to around 69%. However, UBS analyst Simon Penn stated bluntly in a latest report that this aggressive bet ignores the most important political operating rule in Washington.
Penn pointed out that over the past 35 years since 1990, apart from the rate hike the Fed just implemented this month (September 2026), history shows only three instances—in 2004, 2018, and 2022—where the Fed raised rates at the September meeting closest to an election. After completing the historically rare fourth pre-election rate hike in September, the market is still betting on another hike immediately on October 28, which in UBS's view makes no sense in terms of political logic.
Penn emphasized that based on historical data, over the past 35 years the Fed has zero record of raising rates at the October meeting on the eve of a midterm election. The October 28 policy meeting is only a few days before the early November midterm election voting. If policymakers, right after tightening in September, were to act again just before voters head to the polls and create a chain of rate hikes, it would be tantamount to openly detonating the market before the election—a political accusation no Federal Reserve could withstand. In fact, Fed Chairman Kevin Warsh had previously characterized the September rate hike as "removing a dose of accommodation"; Fed Governor Lisa Cook also made clear that AI productivity can hardly offset the price pressures from energy and infrastructure in the short term.
Penn believes that since the Fed has already demonstrated its determination to fight inflation in September, it has every legitimate reason in October to "hold steady" and observe the lagged effects of policy, thereby avoiding the midterm election spotlight and postponing the next move to December. At that point, delivering a full 25 basis point rate hike at the December meeting would be logical, and the cumulative rate hike expectation for the next year would rationally fall back from the current 91 basis points to around 75 basis points.
Even though an abrupt rate hike in October is unlikely, elevated borrowing costs have already exerted a real suppression on US stocks. UBS US equity strategist Keith Parker warned that the 10-year Treasury yield has jumped about 100 basis points within a year, rapidly squeezing out the valuation excess from equity assets. Parker noted that the S&P 500's forward 12-month price-to-earnings ratio has retraced 17% from last year's high, and the severity of the selloff has approached recession-era levels, with a trajectory highly similar to the aggressive tightening cycle of 1994. Historical reviews show that once the cumulative rate hike in a single year exceeds 100 basis points, the broader market often struggles to hide its weakness. With energy risks unresolved and inflationary drivers still present, the room for a US stock rebound has been firmly locked down, and the market will still have to trudge forward under a huge valuation cloud.
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