The Fed Holds, Two Officials Want a Hike, and the AI Trade Splits After the Bell

The Fed held rates at 3.75% to 4%, but two of its 12 voters wanted a quarter-point hike

The Federal Reserve kept its benchmark rate in a range of 3.75% to 4% on Wednesday. The vote was 10-2, and both dissenters wanted a hike: Governor Lisa Cook and Cleveland Fed President Beth Hammack "preferred to raise the target range for the federal funds rate by 1/4 percentage point at this meeting," the Fed's statement said.

It was Cook's first dissent since joining the Fed in 2022. Hammack also dissented in July, again in favor of a hike.

The hold follows a quarter-point increase in September, the Fed's first hike since 2023.

The statement got more upbeat on growth

The statement described the economy as "expanding at a strong pace," up from "solid" in September. On prices, it kept the same message:

"Inflation remains elevated. The accumulation of more information will help the Committee determine the policy stance appropriate to ensure a timely return of inflation to the Committee's 2 percent goal. The Committee will deliver price stability."

December is still in play

Traders see about an 85% chance of a quarter-point hike at the next meeting, on Dec. 9. That is a market probability, not a decision, and Fed Chair Kevin Warsh declined to point to any date (see the next story).

The latest data the Fed has in hand: consumer prices rose 3.7% in the year to September, 2.6% excluding food and energy. The September PCE price index, the Fed's preferred inflation gauge, is due Thursday morning.

What it could mean

A hold with two votes for a hike keeps higher rates on the table. If inflation data keep running hot, a December hike could push yields higher and weigh on rate-sensitive stocks such as utilities, real estate and small companies. If the data cool, the hold could turn out to be the end of this round of hikes, which would ease pressure on bonds and on stock valuations.

Is Wednesday's hold a pause before another hike, or the high point for rates in this cycle?

Warsh on next week's midterms: "politics played no role in the decision"

The decision came six days before the Nov. 3 midterm elections, and the question was put to Warsh directly at his press conference. Elizabeth Schulze of ABC News asked whether the midterms factored into the hold, and how the Fed could assure the public that politics were not at play.

Fed Chair Kevin Warsh answered that "politics played no role in the decision." He said he had just spent two days with his colleagues and added: "I didn't hear an utterance about politics."

The question had been raised before the meeting. In a note, JPMorgan's Michael Feroli wrote:

"A decision to leave rates unchanged less than a week before the midterm elections that goes unexplained would only encourage thoughts that policy is being driven by considerations other than employment and inflation."

Why not hike today

Asked by Colby Smith of The New York Times why the Fed did not simply raise rates on Wednesday, Warsh said: "Quashing inflation is not about some fixed individual date on a calendar."

He also repeated that he does not want to signal the future path of rates: "I don't believe in forward guidance, absent exigent circumstances, absent a crisis."

On the economy, he said: "Broadly, what I heard in the room the last couple of days is consistent with my own views, which is the economy is strong." He said the capital spending story is "not just strong, but it is broadening."

Fewer rate-setting meetings

Warsh said eight meetings a year remain the right number, but in 2027 one will focus only on broad monetary policy strategy, with no rate vote and no policy statement expected. For 2028, he said he expects two strategy meetings and six for setting policy. No Fed release on the change has been published yet.

What it could mean

With no forward guidance, each data release may carry more weight, which could make bonds and stocks more jumpy around inflation and jobs reports. A clear statement that politics played no part could also take one worry off the table for markets ahead of the vote; if a December hike comes after the election, though, the timing debate may return.

Without guidance from the chair, will markets react more sharply to each new inflation number?

The S&P 500 rose for a third straight day, but more of its stocks fell than rose

The S&P 500 gained 0.28% on Wednesday, its third straight up day. The typical stock did not follow it.

• Advancers: 247 S&P 500 stocks
• Decliners: 256
• Median S&P 500 stock: -0.06%
• Equal-weight S&P 500 fund (RSP): -0.02%, against +0.35% for SPY, which tracks the regular index

It was the second day running that the index rose while more of its members fell. The gains came from a handful of AI hardware and chip names, among them Vertiv, Oracle, Micron, Broadcom, Lam Research and Sandisk.

Barely a move on the Fed

Stocks barely moved on the 2 p.m. decision and edged up during Warsh's press conference; the S&P 500 fund set its high for the day in the 2:35 p.m. bar. The day's lows came at 9:45 a.m., well before the Fed.

Sectors

Technology (+0.80%) and the VanEck Semiconductor ETF (SMH, +1.74%) led. The laggards:

• Utilities: -0.84%
• Real estate: -0.73%
• Communication services: -0.42%
• Consumer staples: -0.36%

The largest companies split as well: Alphabet (+1.34%) and Amazon (+0.59%) rose, while Apple, Meta, Tesla and Nvidia fell, all ahead of the after-hours reports from Microsoft and Alphabet.

What it could mean

When an index rises on a few large names while most stocks slip, the gain can be fragile: if the leaders stumble, little is left to hold the index up. It can also go the other way, since narrow advances have sometimes widened out later as more stocks catch up.

Is a third straight gain built on a handful of AI names a sign of strength, or a warning that the advance is too narrow?

AI builders led: Vertiv jumped 16.6% as organic orders more than doubled, Oracle 10.6% on its fiscal 2030 outlook

The companies that supply the AI buildout did the heavy lifting on Wednesday.

Vertiv

Vertiv, which makes power and cooling equipment for data centers, rose 16.59% to $243.17, the best performance in the S&P 500 and its best day since February. Third-quarter revenue rose 61% from a year earlier to $4.31 billion, organic orders more than doubled, and the company raised its full-year guidance. Adjusted earnings were $2.21 a share, up 78%. Chief executive Giordano Albertazzi said the company is in the middle of the largest infrastructure buildout and that it is accelerating.

Oracle

Oracle rose 10.58% to $144.34 after it gave a fiscal 2030 revenue outlook of $225 billion, which implies annual growth of 35%. The company also said it would limit additional fundraising between fiscal 2027 and 2030 to $20 billion, and that it expects capital spending to peak in fiscal 2027 and 2028.

Memory and chips

SK Hynix reported a record quarter: revenue up 328% from a year earlier to roughly $78.7 billion, and operating profit up 632% to about $62.7 billion. Its US-listed shares rose about 13%. Other chip stocks rose:

• Sandisk: +7.66%
• Micron: +5.86%
• Lam Research: +5.39%
• Applied Materials: +5.07%
• AMD: +3.24%
• Broadcom: +2.77%
• PHLX Semiconductor index: +1.75%

Nvidia was the exception, down 1.17%.

Both sides of the spending

Bill Northey, investment director at U.S. Bank Asset Management Group, said: "The near-term cycle remains incredibly healthy." He added: "Will it be universally a profitable endeavor, or will there start to be some winners and losers that emerge there, and we tend to think that it leans towards the latter."

What it could mean

Strong orders at suppliers such as Vertiv and SK Hynix suggest the AI spending wave is still growing, which could keep supporting chip and equipment stocks. The same spending is a cost for the companies paying for it, and if investors start to doubt the returns, the suppliers' biggest customers could be marked down first.

Are the AI suppliers the safer way to own the buildout, or the most exposed if spending slows?

F5 sank 20% on its outlook and a downgrade; Enphase lost 16% on weak guidance

F5

F5, which sells software that protects companies' apps and networks, fell 20.43% to $365.53, the worst performance in the S&P 500 and its worst day in at least eight years. Its forecast calls for revenue growth of 8% to 9% in its new fiscal year, after 11% in the year just ended, and Piper Sandler downgraded the stock to neutral from overweight.

Enphase

Enphase Energy fell 16.03% to $24.99, its lowest close since March 2020. The solar equipment maker forecast fourth-quarter revenue of $225 million to $255 million, below the $293.3 million of the third quarter. In its results, the company said:

"Our core U.S. residential solar market continues to face headwinds from higher interest rates and the expiration of the Section 25D federal tax credit"

Other big movers

• Genmab (US shares) +28.25%, a record close: its experimental head and neck cancer drug, taken with pembrolizumab, cut the risk of death by 50% in a late-stage trial compared with pembrolizumab alone.
• Wendy's +15.15%: Nelson Peltz's Trian and its partners proposed $7.35 a share in cash; the proposal is non-binding, and Wendy's said a committee of independent directors will evaluate it.
• Brinker International +12.34%: the owner of Chili's raised its full-year guidance.
• Wingstop +12.18%: after its third-quarter results.
• Logitech -12.12%: its holiday-quarter forecast includes a $70 million to $80 million hit from a chip supplier's plant shutdown.
• Boston Scientific -5.81%: it forecast fourth-quarter sales 1% to 3% below a year earlier.
• Robinhood -3.31%: third-quarter earnings of 51 cents a share fell short of the 56 cents analysts expected, and crypto revenue fell 55% from a year earlier.

What it could mean

F5's drop suggests the market has little patience for slower growth at tech companies, and other software names that report soon could face the same test. Enphase itself named higher interest rates as a headwind: if yields keep rising, home solar and other borrowing-dependent businesses may stay under pressure, while a turn lower in rates could give them room to recover.

Do Wednesday's big losers reflect problems inside each company, or a market growing less forgiving of any slowdown?

The 10-year yield closed just above 5%, and U.S. crude rose almost 2%, near $102

Rates

The 10-year Treasury yield closed just above 5% on Wednesday, after finishing just below that level on Tuesday. It was the highest close since Oct. 21. The 30-year yield was about 5.36%.

Oil

December U.S. crude (WTI) rose almost 2%, to near $102 a barrel, in last trades after the close; no settlement figure was available yet. It gave back part of a bigger gain: at the day's high it touched $103.55. Brent, whose December contract expires Friday and traded thinly, was little changed around $114.

The reporting pointed to supply worries in the Middle East. Fighting escalated in Yemen, where the Houthis attacked Aden airport on Wednesday, according to government officials. On Tuesday, the Houthis said they had hit Saudi Arabia's biggest oil refinery with a missile; Saudi authorities did not immediately confirm it.

US crude stockpiles also fell unexpectedly: the Energy Information Administration said energy firms drew 1.9 million barrels from storage in the week ended Oct. 23, against a forecast build of 15,000 barrels.

Dennis Kissler, senior vice president of trading at BOK Financial, wrote in a note:

"Crude futures once again pricing in nearer term tighter supplies on news the US is likely to re-start military operations soon, which could be more intense than in the past given the latest attacks on Saudi Arabia and other Middle East allies"

What it could mean

Oil near $100 and a 10-year yield above 5% can work in the same direction: costlier oil can keep inflation readings high and make another Fed hike more likely, and higher yields have tended to weigh on stock valuations. A calmer Middle East could pull oil lower quickly and take some pressure off yields, while new strikes on Gulf energy sites could push both higher.

How long can stocks hold near their highs with the 10-year yield above 5% and oil near $100?

After the bell, Microsoft rose about 4% as Azure grew 48%; Alphabet fell more than 8% even as Cloud revenue more than doubled

Two of the biggest AI spenders reported after the close, and the market split them. These are early extended-trading moves, which can change through the evening.

Microsoft: up about 4%

• Revenue: $92.28 billion, up 19%, against $90.69 billion expected
• Adjusted earnings: $4.89 a share, against $4.73 expected
• Azure revenue: up 48%, to $33.2 billion, the first time Microsoft gave the figure in dollars
• Microsoft Cloud revenue: $63.9 billion, up 30%
• Commercial remaining performance obligation: up 73%, to $677 billion
• Free cash flow: $18.63 billion, down 27% from a year earlier

Chief financial officer Amy Hood said: "Results exceeded expectations across revenue, operating income, and earnings per share."

Alphabet: down more than 8%

• Revenue: $127.6 billion, up 25%, slightly below the $128.22 billion expected
• Google Cloud revenue: up 103%, to $30.7 billion
• Search and other revenue: $63.35 billion, up 12%, short of a $64.96 billion estimate
• Capital spending in the quarter: $51.4 billion
• Free cash flow: negative $9.07 billion for the quarter
• The Gemini app reached 1 billion users

Coverage of the report focused on free cash flow, which was negative for the second quarter in a row. Earnings per share were $2.12, and other income swung to a loss of $8.2 billion; it was not immediately clear whether the $2.12 is comparable with analysts' estimates.

Chief executive Sundar Pichai said: "We had a strong quarter and are now on a half-trillion dollar revenue run rate."

During the regular session, before the reports, Alphabet had risen 1.34% and Microsoft had slipped 0.06%.

What it could mean

The split could suggest investors are no longer rewarding AI spending on its own; they want to see it paying back in cash. If that view spreads, the companies spending the most may face more pressure while their suppliers keep benefiting. Strong Azure and Google Cloud growth could also reassure the market that AI demand is real, which may support the whole group once the free cash flow questions settle.

Is Wall Street starting to separate the AI winners from the AI spenders?

Gundlach wants a hike now, Karsan expects a dovish turn, and inflation data lands Thursday

After the hold, analysts split into two camps.

Hike now

DoubleLine CEO and CIO Jeffrey Gundlach said on CNBC's "Closing Bell" after the press conference:

"I think the Fed should be raising interest rates, based upon the 2-year Treasury being at 4 and three-quarters percent, and now the yield curve in the wake of this news conference is steepening again."

Referring to Warsh's comments at the press conference, he added: "What are you waiting for? You just upgraded the economy right here."

Steven Wieting, co-founder of the CIO Group, said waiting until December would "just be prolonging our agony." Jeff Schulze, head investment strategist at Franklin Templeton Institute, said: "Nothing from today rules out another 25 bp hike before year-end." He added that the Committee "seems content to unwind last year's cuts at a measured pace which historically has been more favorable for risk assets."

The next move is dovish

Cem Karsan, founder and CIO at Kai Wealth, told CNBC's "Power Lunch":

"This, in my opinion, is kabuki theater."

He said "the only way to respond to what's important, which is the long end of the curve, is through more dovishness from the Fed, which will be coming in the months and quarters to come. I believe that is the next move."

Thursday: the PCE price index

The September PCE price index, the Fed's preferred inflation gauge, comes out Thursday morning. Forecasts: the headline is expected to rise 0.5% for the month, lifting the yearly rate to 3.7% from 3.4%; the core rate is seen rising 0.3%, to 3.1% over the year.

What it could mean

A hot PCE reading could strengthen the case for a December hike and push yields higher, which has tended to weigh on growth stocks. A softer reading could support the view that the Fed is near the end of its hikes and give bonds and rate-sensitive stocks some relief.

Which camp will Thursday's inflation numbers favor?

The close: all four major indexes rose for a third straight day; the S&P 500 gained less each day

Stocks edged higher on Wednesday, the third straight gain for the S&P 500, the Dow, the Nasdaq Composite and the Russell 2000. For the S&P 500, each day's gain was smaller than the one before: +0.70% on Monday, +0.60% on Tuesday and +0.28% on Wednesday.

• S&P 500: 7,743.98, up 21.38 points (+0.28%)
• Dow Jones Industrial Average: 52,475.10, up 97.53 (+0.19%)
• Nasdaq Composite: 26,549.85, up 72.04 (+0.27%)
• Nasdaq 100: 29,813.16 (+0.55%)
• Russell 2000: 2,830.51 (+0.41%)
• VIX (the fear gauge): 16.91, down 0.61 (-3.48%)

The S&P 500 closed at its highest level since Oct. 21 and is 0.96% below its record close of 7,818.93 from Oct. 6. The Nasdaq Composite is 3.80% below its own Oct. 6 record. The S&P 500 is up 13.13% this year.

The day's lows came at 9:45 a.m.; the indexes barely moved on the Fed's 2 p.m. decision and edged up during the press conference.

Elsewhere

• 10-year Treasury yield: just above 5%
• U.S. crude (WTI, December): up almost 2%, near $102 a barrel
• Gold (December futures): $4,081.80 an ounce, +0.18%
• Bitcoin: about $81,000
• Dollar index: 102.13, -0.19%
• CNN Fear & Greed Index: 36, "fear," up from 33.6 at Tuesday's close

What it could mean

Three straight gains, a lower VIX and sentiment still in "fear" can be read as a market with room to climb, since gloomy sentiment has often come before further gains. The shrinking daily gains and weak breadth point the other way and suggest the buying is losing force; Thursday's inflation data and the reaction to Microsoft and Alphabet could decide which reading holds.

With sentiment still in "fear" and the S&P 500 within 1% of its record, is the market climbing a wall of worry or running out of buyers?