Fed Decision Watch: Inflation, AI Earnings, Oil and Election Risks 10/28/26

0:00Tu Sausage McMuffin with Egg no cambió. Tu recibo, sí. El Sausage McMuffin with Egg Extra Value Meal. Trae un hash brown y un café pequeño por cinco dólares. Solo en McDonald's por tiempo limitado. Precios y participación pueden variar. El precio de la promoción puede ser más bajo que el precio del meal. This episode is brought to you by Schwab Market Update, an original podcast from Charles Schwab. Schwab Market Update, an original podcast from Charles Schwab, provides an information-packed daily market preview on stock updates, U.S. and global economic news, monetary policy decisions, and key results and statistics that may impact your trading.

0:35Download the latest episode and subscribe at schwab.com slash marketupdatepodcast, or find Schwab Market Update wherever you get your podcasts. You're listening to The Exchange. Here's today's show.

0:56Thank you very much, Leslie, and welcome to our special two-hour Fed coverage. I'm Kelly Evans here in Washington, D.C. with Brian Sullivan. And here's how the markets and your money look as we are about an hour away from the Fed rate call and also the guidance on what they may do. The markets are up across the board. Not a big day, Kelly. Don't want to make too much of it. Dow up three tenths. Nasdaq up about eight one hundredths. Oil is up three percent. That may be a bigger story. The 10 year yield. It is also back above five percent. Part of that WTI 103, as you mentioned, we'll circle back to that in a moment.

1:28We've got a bunch of special guests coming up to tackle the Fed, these markets, oil, politics and more. But let's start with the key actions and words to watch out for in the next two hours. Steve Leisman is across town with the final setup over at the Fed. Steve. Hey, Kelly, the Fed is wildly expected to hold rates unchanged today. But many Fed watchers expecting as many as two, maybe three descents today in favor of higher rates. The trouble for the Fed will be explaining why it's remaining on hold when inflation has come in hotter in the last several reports than it did before the last meeting when it hiked rates.

2:00VBCE comes in tomorrow as expected. That's the Fed's preferred inflation indicator. The year-over-year headline rate is going to rise to 3.7 from 3.4. That's the highest in May 2023. Core is going to tick up to 3.1 % from 3%. Would be difficult for those numbers to give Fed Chairman Kevin Walsh the confidence he said he needs that inflation is headed back to the 2 % target. Still, several Fed governors and New York Fed President John Williams argued between meetings that the Fed could wait before hiking again ahead of the meeting. That's how the market has it priced in. Just a 7 % chance of a hike today.

2:30But 88 % probability that it resumes hiking again in December. Another almost 50 basis points is priced in for 2027. The September statement said the Fed hike was to support, quote, a timelier return to the 2 % target. The question is, how does the Fed statement today explain a hold, a hawkish bias in the statement? That's one way to avoid dissent. But Warsh has said he wants to avoid telegraphing the Fed's next move. Kelly? Steve, I'm sorry if I missed it that you said this, but do you expect dissents? Yes, as many as two or three. In our CNBC survey, 18 of the 30 respondents said there could be dissents today.

3:10Logan and Hammock are the two primary suspects with some question back and forth about whether Kashkari would join in. And that's really the question, Kelly. One of the things Fed chairs have done in the past is sneak a line into the statement that says, OK, we're holding today, but we're leaning towards hiking in the future. Greenspan, Warsh's icon, did that all the time. But Worscht does not want to telegraph the outlook. All right. Steve Leisman, thank you. We'll see you next hour for The Decision. And let's bring in our first all-star panel now. We have Steve Whiting. He's the chief investment strategist at CIO Group.

3:43Joe LaVornia is the chief economist at SMBC Americas and former counselor to Treasury Secretary Besson. And Jeff Blazek is co-chief investment officer of Multi Assets at Neuberger. Welcome to all of you. I'll go in reverse order. Jeff, you can be first. I guess I'd frame it maybe the following way, which is if they don't hike today, but still want to have a hawkish bent. Are the markets going to revolt like they did in, I think, July when the same thing happened? Warsh didn't hike. And then that gave way to yields backing up, Besson's intervention in August to try to cap yields and so forth. So is there a risk of a similar kind of outcome now?

4:17There's a risk. You know, on any Fed day, we want to be careful. But in general, I think it's going to be a pretty quiet meeting. I think they're going to be careful to still have a lot of flexibility in December for that hawkish impulse. But the market's very familiar with that and already pricing it in. So really, I think the bigger news today is going to be these earnings with the AI names and the hyperscalers. But certainly we wait with bated breath to see what they say. Joe, you agree? Yeah. I mean, in July, it was like 35 percent chance the Fed would hike. So it's just seven now, as Steve was saying.

4:46So I agree with Jeff. Not moving isn't going to necessarily lead to, you know, losing the back end, especially if there is going to be a hawkish bias, which I think it will, because the statement is going to reflect the fact that, you know, policy needs to go further. and the chair did say in recent comments that it was a dose of monetary tightening, which means more is coming. But Stephen White, you could have a football game that is 0-0 after the third quarter and still a good game because the defensive battle, and even if the Fed doesn't move rates today, I think the drama's twofold. Number one, to Kelly's point, or Steve's point about dissents, what does that say about the makeup of the Fed?

5:20And then also, what happens next year? Particularly because, I don't know if you know about this, we have an election. Yes. In a week. And maybe that's why markets are so confident it is just 7 % chance. I mean, in some ways, they'll just be prolonging our agony. I mean, the groundwork that Chair Warsh has laid saying that inflation is too high, it's entirely a choice of the Fed. We've only taken away a dose of accommodation. I mean, really, what's the argument here when we're just going to go in December anyway? So I think that markets, look, I'm not predicting action today. It won't be any kind of genius if they surprise us.

5:55But the chance that they actually shock us now is above 7%. And I would tell you that if it does mean that they've clarified the limited extent to further tightening is necessary, it really won't hurt us that much. And it may be better than waiting all the way to December. But I pick up on your frustration. And you remind me of Claudia Somm, who's also been writing and saying, again, just from her point of view, that if they're going to hike and if conditions demand it, then they should do it now. And I think she said something to the effect of, don't tell me it's because of the midterms. No one wants to hear if hiking is the right thing to do, no one wants to hear that, well, they thought they should skip this meeting just in case it has.

6:32But, you know, do what you need to do, I think, would be her call. And it sounds like yours. There's all sorts of things to consider. If monetary policy was really in a credible track and inflation had been secured at a trend rate that's low enough, you can actually look through shocks. You could just say a lot of things have generated inflation in the near term. But Chair Walsh hasn't argued that that's what policy has been like, and that's where we are. So that's why it's a little harder to accept his analysis and see the Fed on hold today, if that's what they do. Yeah, but I'm old enough, Joe, to remember 2024.

7:03And there was a presidential election in 2024. And I'm also old enough to remember a Federal Reserve that cut interest rates, some would say rather mysteriously, into the presidential election in the fall of 2024. Now we're raising rates. Are we theoretically young? A, two points I'm making. Is that number one? I said A and one. I just messed that whole thing up. A, I don't know if elections matter to the Fed. You tell me. And two, I did that on purpose. And two, are we undoing what was done two years ago? I don't know. Well, look, I do think politics matter. No entity in administration or either institution operates in a vacuum.

7:46We're told it's apolitical. Politics don't matter at all. To some extent, but not totally. I mean, look, the irony is that most of the year, the vast majority of investors said the Fed wasn't raising rates because there was an election. And Kevin Warsh had made some deal with the task forces not to hike, which I never thought made any sense. I took the chair very seriously in what he said about inflation. The Fed raised rates in September because the economy turned out to be stronger. The rise in rates has been a growth story. Inflation's a lagging indicator. I never thought the Fed, and I did think the Fed was going to hike the insurance, the Fed would hike a lot relative to where markets were from back in the spring.

8:20But they don't have to go every meeting, Brian. They want flexibility and optionality. And I believe it was Chris Waller who basically made the point that, look, or someone else, I forget whom, but basically six weeks can make a big difference whether they go now and go again in December. You wait and see what the data looks like in December. You go then. It's not like there's a credibility problem. Jeff, what are you watching for the signals of why they should hike and how quickly? because there was just some work from Michael Darda in the past couple of hours. And he says, look, look at kind of nominal growth in the economy.

8:51It's accelerating. Inflation kind of staying where it is means that they should lean against that. But I think the reason I wanted to highlight that is because they're kind of leading indicators of what we're ultimately going to find in employment and inflation. And by the time anything shows up in employment and the official inflation numbers, the Fed's probably behind the curve. So what are you watching? Well, I would agree with what Joe said, which is they need to monitor the impact of these higher rates. It's like a thermostat. You know, they just turned it up to a degree last month. Let's let the room adjust a bit.

9:21And you're right about the growth accelerating. The driver of the growth is investment, business investment from the AI cycle. And in the last month, we have seen a wrench thrown in, which is higher rates are being priced by the market on this massive multi-trillion dollar capital raise. And so in a way, if that interferes with the growth trajectory of investment, that could cool the economy by itself. And so we might have the market taking care of some of the Fed's problem. And that's going to transmit in the funding costs. What does that mean, taking care of the Fed's problem? Well, the spreads are widening.

9:53So even actually the 10-year Treasury has fallen 30 basis points in the last month. It's gone against the grain of this hike impulse that the Fed has. And it's because the spreads are widening. Now you're seeing more speculative AI paper, especially in the teens in terms of the yields of where they're going to be raising that. And so if that does start to throttle, it's basically the hikes are happening in the private industries around technology. And that is such a big driver of growth. You think the Fed is watching that? Are they watching AI debt? Because if they start to blow things up, meaning debt levels at specifically very in debt, I'm trying to watch my words here.

10:31Yeah. Because I don't want to indict any company, but there have been pretty obvious big names out there whose debt was 15%, 14%. Right. It's moving not in a good way. Is the Fed aware of this? The Fed is definitely aware of it. I think it's going to be the key words in the press conference, how aware, how top of mind it is. Because if it is top of mind, that might actually be dovish. That might suggest that they're allowing the market to handle this AI thing and the growth issue. And by the way, the inflation is temporary. 1 % of it is from tariffs from the energy shock that will work its way through and through some of the inflationary pressure of AI that could reverse if we see that decelerate.

11:09Steve? I think you're definitely seeing a tightening of financial conditions. The very beginning of this, when Chair Warsh wasn't the dove that a few people thought he would be, we have seen credit spreads. We've seen a tightening of financial conditions, four to five rate hikes. That's for real. That's the real tightening steps. The Fed does have to follow through with that if it doesn't want that to unwind. But there's the other thing. I think, you know, what was a little dissatisfying is the idea that the Fed is always responsible for inflation. So the Fed has always got to somehow deal with supply shocks and treat them as a monetary issue.

11:44It almost risks letting Iran tell the Fed what to do. And what do you so we've debated this a little bit in previous meetings that they shouldn't necessarily respond to that. But that's why I think the nominal boom is so interesting and important, because, you know, if it's just oil, doesn't make a lot of sense to tighten policy in response to that. But if there's a nominal GDP boom. Yeah. And that is, again, investment spending and compute at 65 percent rates, borrowing even more next year. And I think we're going to see after the close where we see Microsoft and Alphabet, if they join Meta, it's going to be.

12:22And these are the strong hands in the market that want to invest a lot more. And that is demand for capital that's pushing up interest rates. But spending booms, business spending booms don't last forever. And at some point, interest rates will be out of line when that boom comes to an end. Joe, just going back to the Greenspan era again, because maybe that's where Warsh wants to go. But Greenspan was really trying to understand the business cycle, which is not something you hear as much about in the econ profession lately. At least it seems to me you hear a lot more of just about unemployment and inflation as if they exist independently of these larger kind of cycles.

12:53We're clearly in some kind of AI-driven business cycle right now. If Warsh were to kind of think that through, kind of to Steve's point, what should the response of monetary policy be? In the short term, it's a raise-raise because, as Kevin has said many times, inflation is above target. But the sequencing is such that if the AI pays off, as the Internet boom did in some sense a few years later, it will ultimately be disinflationary because you're increasing aggregate supply. and assuming productivity rises, those are all really good things. But it's just, again, the timing of it. And the short-term AI is certainly lifting prices.

13:28When you look at import prices rise at a four - or five-year high, and you see it's being driven by capital goods, that's all the imports. What does the Fed rate hike can do about that then? Well, it can't do anything about it, at least initially. But to Jeff's point, there is some tightening of financial conditions. But importantly, Brian, I'd say, look, the Fed cut three times last year in response to what it thought was a weak labor market due to AI-related layoffs, impending layoffs. It didn't happen. If you're the Fed, you want to remove those 75 basis points of easing and then probably make an allowance to be 25, 50 basis points for a higher R star equilibrium rate, accounting for the fact that your return on capital is higher because of the, say, I boom.

14:04I'll just think back to the late 90s. And we'll talk more about this in the next few meetings, I guess. But they raised rates. I think it was maybe almost a 6.5 % kind of in the late 90s. At 475 to 6.5. OK. So ultimately, the boom crashed. whose note was I reading about this? They then had to take rates to close to zero. I mean, not zero, but by 2003. One percent. One percent by 2003, all of which seems kind of counterproductive. So I know at the time people were arguing they maybe should have hiked rates more in the 90s, which seems almost like... Well, in 94, they raised rates 250 basis points.

14:37300. 3 percent. February 94 to February 95. And 1995 was the single greatest year for the S &P 500 in the last 50 years. I don't know if it was... Was I sure about that? Yeah, it was a good one, but... I am sure, Joe. So you know what Fed ultimate means? And if I'm wrong, if I'm wrong, I'll buy you lunch. And if you're wrong - I don't work for Treasury, so I guess you could do that. I can. Treasury, no. But now that you're back in the private world, I could do that. But 95 was a 30 - Help me out here, Stephen. 34.7 % gain? 25 % gain for five consecutive years. And that's the thing. The bubble in the risks that the private sector take, the Fed isn't responsible for that bubble.

15:16but their rate hikes can be responsible for pricking it. What was the year? What was the return in 1995? Don't worry, we'll get it. I said, we got to get this after. By the way, at four o 'clock today, I'm going to go across town. I'm going to sit down with your former boss, exclusive interview with Treasury Secretary Scott Besson. Terrible. Take that off. Terrible picture. What of me, not of him. What am I asking him? Well, you're putting me on the spot. No, it's okay. I'm going to leave it to you, Brian. I think you can figure it out. You're smart. I hope so. Well, thank you for saying that.

15:45even if I'm wrong about the 1995 return. You should ask him about that analogy, because in 1995, the S &P returned 37.6%, including reinvested dividends. I was off. Price action was 34%, making it one of the strongest years in the history of the index. But not the strongest. I'll go back and clarify. I didn't say ever. I said in 50 years. I'm just wondering if you go back and say, at the time, I always thought the Fed should have done more. I wonder now if they should have reacted as much as they did. You know what's interesting? I remember that period because I'm old, but I remember that period when people said, well, the Fed raised rates.

16:20This doesn't mean anything. It's not going to be enough. So this notion that Fed is going to take rates to six and a half, I don't think is likely. Like eventually, sort of as Jeff was getting at, as we hike rates and the forward curves tighten, we'll slow things. And I know we got to go. But my point in this arguing about the year is, I think, to Kelly's point, a very good, important point that she's making, which is it depends on where we are in the AI cycle. Right. If we're in the 1994 portion of the cycle, you can raise rates and no one's going to care. Speed ahead. If you're in the 99 cycle.

16:50Yeah, that's you're in big trouble. Or do you raise rates so much trying to kill the A.I. cycle that you end up killing the whole economy and then having to take rates to zero a few years later when you maybe should have just backed off and let it fall on the people who are most exposed to names that were not all under the Fed's control. The 90s analog really is the right one to think about. Is this 97? Is this 2000? Because ultimately, if we have multiple years of runway for this cycle to sustain itself, then the Fed probably should hike. But it looks like we're now going heading in, and we'll see tonight with some of the CapEx numbers.

17:18If we took Meta's numbers, for example, we're heading into a fourth year that's going to be compounding at a 65 % growth rate, year four already. And again, stronger hands. This is like permanent capital. We now have AI agents as a new worker in the workforce. Yes. That's dramatic, but everything comes to an end. And we don't have a bubble to pop right now, unlike 99. So back then, the S &P was trading at 45 times. We don't have a bubble. Today, it's at 19 times. So at least valuation, the durability of the earnings is the real question. But valuation-wise, there is not a bubble that has to be popped with any kind of policy rate action at this point.

17:54Great conversation. And we're going to lay that bet down, Joe. I'm going to say we had a better year coming out of the financial crisis. is my guess. Okay. Listen, I'm on TV. I'm on television. If I'm right, I'm going to talk about it for months. If I'm wrong, it'll never come up again. It should be in politics. That's next. Maybe. Stay tuned. Stephen, Joe, Jeff Blazik, thank you very much. Joe, we're going to see you back in a few minutes. Are you guys all coming? Who's coming back? I'm coming back. You're coming back? He's coming back. Okay, good. All right. With oil hovering right around$102 a barrel, the U.S.

18:28reportedly telling Gulf countries potentially prepare for more strikes on Iran or the Strait of Hormuz after the midterm. Megan Gassella will give us the very latest on what we know next. And stocks are slightly higher right now, but we're well off the session highs. 45 minutes to go until the rate decision. Our special live coverage from Washington continues after this.

19:01Cash Brown y un café pequeño por cinco dólares. Solo en McDonald's por tiempo limitado. Precios y participación pueden variar. El precio de la promoción puede ser más bajo que el precio del meal. This episode is brought to you by Schwab Market Update, an original podcast from Charles Schwab. Schwab Market Update, an original podcast from Charles Schwab, provides an information-packed daily market preview on stock updates, U.S. and global economic news, monetary policy decisions, and key results and statistics that may impact your trading. Download the latest episode and subscribe at schwab.com slash market update podcast or find Schwab Market Update wherever you get your podcasts.

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20:12Oh, hello. Oil prices are moving higher again, over 103 for WTI, 115, almost 116 for Brent. This comes as the U.S. is reportedly warning several Gulf countries of a possible short but intense military campaign in Iran after the midterms. Megan Casella is here with the latest developments. Megan. Kelly, that's exactly right. This is according to reporting from The Wall Street Journal, which was citing people briefed on the conversations. They say the U.S. has told several Gulf Arab countries to be prepared for what the newspaper described as a short, intense military campaign, as you said, after the midterms.

20:46Now, the journal says that this is the latest sign that strikes could be coming after the U.S. took some steps recently to restock munitions in the region and move U.S. troops off some vulnerable bases. And just in the last few minutes, guys, Iran's foreign minister posting on social media that while Iran's armed forces are fully prepared to defend the country, they are giving diplomacy a chance to succeed. A White House spokesperson told me simply that President Trump is keeping all options on the table. And the president himself said late last night that essentially the war will end when he wants it to.

21:16He said the Iranians have wanted to make a deal, but that they like tapping it along. He also said maybe they're waiting for the election or something, but that's not going to help them. Now, guys, remember, President Trump has previously said that he will not strike Iran until after the midterms, likely an attempt there not to drive oil higher, not to put the war front and center as voters are heading to the polls. But with those midterms now less than a week away, there is this big question of what happens next. But Megan, interestingly, we're hearing I'm hearing reports now and I'd love for you to filter this for us.

21:47Is this just online scaremongering or are companies and people really being told to prepare for some adverse scenarios? We're being prepared. Yeah, it's a little bit of both. It's being prepared in case you have to be prepared. The U.S. was moving some of those troops around. As I said, they have been moving military hardware into the region. So no reason for companies and others that are there not to be prepared for this. That said, it doesn't seem like there's anything actually being planned yet. Very much still under discussion. We know there's been some diplomacy, some negotiations going on this week.

22:18The Saudis, the Qataris were in Tehran on Monday presenting some proposals. And that's what we just heard from the Iranian foreign minister. They are considering them, the president, President Trump, not wanting to commit one way or the other. He was asked point blank last night, are you planning more strikes after the midterms? And he said, I can't tell you that. All right, Megan, thank you very much. Let's now bring in Bob McNally, founder and president at Rapid Energy Group, somebody who was just, by the way, in the Middle East, in Saudi Arabia a couple of weeks ago when there were attacks on civilian targets, cowardly and deadly attacks, by the way.

22:50There's a huge there's more stuff going on next week. I may or may not be going and there are security alerts that I may or may not be getting about going there. What are you hearing? Because you're dialed in. Yeah. Also, I think you're like ex CIA or something. No, and I couldn't tell you if I was. That's right, because nobody's actually X. That's right. No, look, we're coming to a pivotal point. That's clear. But, you know, the president always has two tracks going. There's the military preparation. We see with the Wall Street Journal, there's a lot of pawing and snorting like the bull is going to charge.

23:21On the other hand, there is diplomacy underway. And the Iranians are being pressured to come to a deal on the nuclear part. It's really the nuclear issue is the core where the disagreement is. And I think there's an effort to do it. So we think odds favor military escalation, but it's not a slam dunk. But everyone understands and is preparing for this is getting ready to come to a pivotal point. And unlike, you know, when I was there, it was the Houthis attack in Saudi Arabia. Now it gets to where you may be next next week. And that is in the Gulf, because Iran could resume attacks against Gulf countries if it is attacked.

23:54There's a massive I posted a picture to X. A friend of mine in Dubai sent a picture of a U.S. military ship, an LHA, which is basically a small aircraft carrier landing vehicle, in the water. It was way off. It was a little blurry, but you could tell what it was. Do you know or have a sense of the military buildup that is currently in the Middle East? Because I'm told it's significant. It is significant. And soon we will have three carrier strike groups, CSGs, in region. We have two already. One's coming in. Now, one of those will probably leave and rotate out, but that will put three in the region.

24:28Also, we have one marine expeditionary unit and another one on the way coming in. So two, that's in case we want to take small islands or big islands or raid the coast. So there's also reports that we're flowing in more aircraft. We're sending Patriot batteries to missile. We are hardening up. The president wants to have a strike option after the midterms. And what is clear is he's going to have it. There was a great piece, I thought, yesterday in the journal from Michael O 'Hanlon at Brookings, where he was just talking about why slow and steady might be the way to go here, because the economic blockade with Iran is working.

25:02But significantly, he said it might have to go into 2028 or 2029 to really kind of bring them to heel. So on the one hand, we actually have a strategy that is working, but you just have to wait it out a little bit. On the other hand, we hear these reports that there might be some kind of near-term escalation. And O 'Hanlon's just saying, look, it might not work because, A, the economic backlash we could see would be significant. B, the strikes literally might not work. And C, you might see more retaliation across the region from an aggravated Iran. So do you think that we'd be better off just waiting this out for the blockade to kind of fully take its toll?

25:37I think we will be better off, and I think that's what we'll do. Unlike me, my CEO, Scott Modell, was in the CIA. He is a top Iran expert. He channels Iran for us. And what Scott tells us is, look, these guys are not going to give up. They're not going to be strangled to death. They've got the money and the guns. The Iranian regime is not going anywhere. The administration is hoping to strangle them by November. We don't think that's likely. What we're likely to see is what we call spiky muddles through continue into next year, into even 2028 and beyond. What does that mean? That means we oscillate between lulls in fighting, like we saw in the summer, and then military escalation, but short of devastating conflicts.

26:14So no desal plants, no electricity plants. And I think we can have both some escalation. The president could attack Pickaxe Mountain, for example, the key mountain under which is buried some critical nuclear sites. He could do that. And then afterwards, there could be a lull for diplomacy. So we think what you see is what you get. We're going to see continued oscillation between lulls and fighting short of devastating war. How much oil is Iran exporting right now? Zero. Zero. So that's what, two million and a half, two million barrels a day off the global market? That's right. And they're not happy about it.

26:45And they won't accept that for too much longer. But they think they can get oil prices higher before they tap out, if you will, on the revenue. They think they can force President Trump to make concessions on the nukes, to accept something like the JCPOA and leave them alone. Then they give up on the Hormuz thing and we're back to status quo ante. But they think they have to hold out for quite a bit longer before that happens. All right, Bob, thank you. Really appreciate it. Thank you. Let's not forget, this is probably the most significant issue, more so than earnings, more so even than the Fed today.

27:15Still ahead, we do have some big earnings after the bell. Alphabet and Microsoft will report. We'll get you the setup from the SIBO next. Yeah, and only got about 33 minutes until the Federal Reserve decision and guidance stocks. They are mostly higher into that print than NASDAQ. The underperformer right now rates, though, back above 5%. Our special coverage live from Washington, D.C., 31 and a half minutes until the Fed. We're back right after this.

27:44welcome back we're in a little bit of a holding pattern today as we wait for the fed decision in half an hour and we're also waiting for microsoft and alphabet to report earnings right after the close oliver renick is at the sebo with more on a high stakes event oliver that's right it's showtime kelly options flows today are balanced in both names with a slight bullish bias but The positioning leading up to these reports has mostly mirrored each stock's relative performance. Microsoft, less than 1 % below its closing record reached earlier this month, whereas Alphabet is flirting with technical bear market territory off about 20 % from its closing high in May.

28:21Market makers are pricing a nearly 6 % move for Alphabet after its report, compared to under a 5 % swing for Microsoft. For Microsoft, it's a smaller implied move than its two-year average swing of 6%, But for Alphabet, which is average less than a 3 % reaction, it is more than double, which arguably makes sense considering the shares dropped 7 % after last quarter's report and then rallied 10 % the report prior. Today's most popular contracts expiring at the end of this week for Alphabet were the 340 strike calls, about$15 higher from here. And for Microsoft, it's the 580 call, which is way up there, 10 % higher.

28:59Big afternoon. And also for us, Options Action Live on CNBC.com. starts today, 1.30 p.m. Central time, guys. Good day for it. Oliver, thanks. Oliver Rennick. All right. It is not just about the Fed. Hey, we're here in D.C., and we are less than a week away from the midterm elections. There's a lot of races, but there's really only a few that are the key to watch. We'll talk about that and the path to a majority in each chamber coming up. Welcome back to our special Fed coverage. The Fed's decision today comes just ahead of next week's midterm elections. And our next guest says early voting is giving us some signs and he thinks it's looking a little blue wavish.

29:39Let's bring in Chris Krueger. He's sitting here with us, TV Cowan's global head of macro research. Welcome. How do you know what the early voting is? This is polling? No, I mean, a number of the states will show Republican ballots, Democratic ballots. They will. All right. I'm behind the times. So what are we learning? Not at all. Well, we're We're being cautious because this was a narrative in 2016 and then same day voting, you know, blew blew the doors off for for then candidate Trump. But what we're seeing so far is, you know, Texas, Georgia and others shattering records. Now, this the flip side of that narrative could be that this is just Democrats cannibalizing the same day vote.

30:18But most indications are that it's not because after what happened in Brazil, I'm sure there are some differences between Brazil and here. And you mentioned 2016. We've had other surprises, so it's hard to know. But what are you? I know you have a couple of areas in particular you think are going to be real bellwethers. What are they? Yeah. So, well, the good thing about the East Coast, a number of these states, not only do they close early, they count pretty quickly. So Florida and Virginia are probably the best two for the House races. Now, if we do have sort of a reverse Brazil situation and the polls have underrepresented Republican support, Minnesota and New Hampshire on the Senate side would be good tells of that.

30:58So by 10 p.m. Eastern on election night, we should have a pretty good sense, you know, if one way or the other. And I'm going to say something and I want to make I want to look right at the camera, the audience. This is nobody's preference. Kelly and I do not have a political preference. This is just what the prediction markets, polls and people we talk to are saying they expect that the Democrats will win the House and likely the Senate, that we will have a blue Congress. Right. We'll have Trump in the White House, but the blue Congress won't be big enough to be a veto proof majority, which means we're going to get two years of no meaningful legislation, but a lot of investigations.

31:42Is that Chris Kruger's base case? Yes. OK. Thanks for coming on. Of course. I'll see you later. Real quickly, by the way, on the screen there, it says Senate blue wave 82 percent. How do we define a blue wave? I think it would have to be controlled. I don't like the waves. Or the red undertow. Is it a margin of win or is it just that means they win both? I think it's my interpretation is they win both. Let me give you a couple caveats, though, on that, because you are going to have a lot of sort of churlish name calling on both sides. The debt limit is an issue if they can't get that done in the lame duck, which seems pretty unlikely at this point.

32:20That'll be a big showdown next year. You're going to see some of those Medicaid cuts maybe coming into play. Debt limit is probably mid to late July of next year. You expect another government shutdown then? Probably. A long one or a short one? One of the advantages President Trump has is that his entire legislative agenda is in the rearview mirror, right? The main thing with those funding bills that really animates President Trump are the agencies dealing with immigration. And both of those, ICE and Customs and Border, are funded through the remainder of his term via that second reconciliation bill.

32:58So Democrats, I don't think, have quite as much leverage as they might have in another time with those government shutdown negotiations. It currently runs until December 11th. But, you know, under President Trump, we've seen the longest shutdowns in American history by by far. So, yeah, I don't know why you wouldn't expect another one. All the while, Democrats are investigating the Trump family. But you work for TD financial firm. If I look at the historical data, the historical data suggests that post midterm elections sort of split, you know, split. What is it? Branches. Shows we're not D.C.

33:37people. Split branches. Congress is one, executive branch another. That's good for the stock market. That the setup historically is for sustained gains because we're going to get two years of just finger pointing. No new legislation. But also you have a tremendous policy tailwind. You have tax policy locked in place for two years, very pro-business. You're probably going to see a meaningful M &A wave that might have even started last week. President Trump isn't going to sign anything. that slows down AI. You've got the Fed coming out with their bank regulatory relief next month. You might even have another wave of tariff refunds next summer.

34:20So, yeah, I mean, to your point, you know, policy is still probably a tailwind for the next year. Real quickly, why do you think we're going to see a deal wave? If you want to get your deal done before the 2028 presidential cycle, you know, it's probably between now and Q1 of next year. Also, I mean, this administration is, you know, has signaled that we're, you know, on antitrust, we're not nearly as tough as previous administrations. And you're already, I think, starting to see that. And so you could really have, you know, an M &A wave between now and the spring. I want to be fair. So if we get a surprise, And and I only say surprise because, again, the prediction markets and the polling, if the Republicans hold one or both houses of Congress, let's say it stays the way it is now.

35:14Does anything that we just talked about or you say change, Chris? No, I mean, the Senate is is sort of the only variable just because they have the confirmation power. So if the Senate does flip, what you might see is a bit of a cabinet shuffle in November, December, because that's the last time you have unified Republican control. You know, judges would also probably halt. But, you know, as long as there's one and it would probably be, you know, the Senate, there's not a huge variance on funny from a market standpoint. It just makes me think some cabinet members might be hoping for a blue win then because they can't be replaced.

35:54Sure. Because it's job security in a weird way. Chris, thanks. Really appreciate it. Also, then you get to blame everything on the other party. Exactly. True. Right? Yeah. You get a mulligan. That's right. Chris Krueger. Keep that green tie on, Chris. I sure will. Purple. All right, on deck. We're now just about 18 minutes away until the Fed's interest rate decision and call on the future coming up. We'll get a small business gut check. But before we go to break, check out shares of Wendy's, the fast food company. Wendy's stock is up 14 % because a big hedge fund guy named Nelson Peltz, who's always buying and selling restaurants, has made a$1.4 billion offer to buy Wendy's.

36:34That would be a 20 % premium on yesterday's closing price stock. Not up that much, but still on pace for its best day since June. You think about square hamburgers, because we're back right after this. Bring back breakfast.

36:52All right, we get the breaking news banner because we're just about 10 minutes away now for that Federal Reserve decision. But obviously, the Federal Reserve has a lot of impact on your borrowing costs and stock market, the bond market. But what about Main Street? You know, the hundreds of thousands and millions of small businesses out there that really matter? Well, small business optimism right there. You could see it. It slipped a little bit in the last couple of months, although it is above where it was before. So what about small business? The heartbeat of America. Holly Wade is executive director of the NFIB Research Center and joins us now.

37:28I love talking about small business, Holly, because 90 percent of companies have fewer than 10 employees or some stat like that. Mom and pops, right? Dry cleaners, bars, restaurants, et cetera. How are they doing? Well, optimism among small business owners in September did decline. It was mostly related to their outlook on general business condition, expansion opportunities. So they have to continue navigating strong and persistent headwinds, mostly related to labor conditions and also inflation, certainly. So those are the two big components that they're still having to navigate. And there are big challenges on Main Street.

38:05There's the uncertainty. Guys, if you can put the main one back on the screen there for a minute, because I find this kind of fascinating. It shows the decline the last couple of months on the right of your screen. But I'm looking at March because March, end of Feb, was when the Iran war broke out. And according to that chart, small business optimism is higher now than it was then, which is interesting because interest rates, 10-year rates are up a full point. The Federal Reserve has hiked rates. And when I look at that chart, I think, well, then the economy must be doing pretty good. And this is what economists are trying to talk about.

38:35Is there a nominal boom, you know, AI-driven and otherwise? How do you explain this? Again, interest rates are up. Oil prices are up. You know, consumer confidence has been meh. Why is small business optimism still a little better now than it was in the spring? Well, for one thing, you know, consumer spending has been pretty resilient. However, resilience isn't a replacement for confidence. So while they're resilient, there's still a lot of uncertainty out on Main Street with their consumers. And so small business owners are starting to get more worried about what that looks like for their customer base, for investments in their business, for investments or for higher interest rates, borrowing financing costs for them, but also for their customers.

39:19And so they're looking to see what household and business spending looks like. And, you know, they're fairly uncertain about what that means for them going forward for the rest of this year and also into 2027. I don't know how they're dealing with inflation, honestly, these companies. And then you also got the monsters of, you know, the Amazons, the Walmarts, the Costcos of the world. You're not only competing against sort of the inflationary monster, but you've also got these massive companies which are able to better handle inflation because they just have the size and scale. It's got to be tough, tough right now to be a small business owner.

39:54It is. One in five of small business owners are saying that inflation is their single biggest problem in operating their business. That's a huge increase from the 14 percent that said the same back in July. And so the six-point increase, we're certainly paying particular attention to that, likely due to the increased cost of gasoline, diesel, fuel oil that they've had to absorb into their business operations. But the bigger picture is they're also talking about insurance costs, rent, supplies and inventory. So all of this combined is putting a lot of pressure on small business owners. And they're getting increasingly concerned about competing with their larger and medium-sized counterparts and, you know, passing along those costs to their customers.

40:40How much and how often to do that and still retain, you know, kind of their balance sheet and not dissuade their customers to go somewhere else. Well, I hope everybody, you can persuade people to shop local when they can. Support your friends and neighbors who run the business. Holly Wade at the NFIB. Really appreciate it. Thank you. Thank you very much. There will be a direct impact from what we're about to find out, which is at the top of the hour, the Fed's rate decision. Let's get a quick check on markets with that. We have the Dow up about 142 points, S &P up two-tenths, Nasdaq barely positive, crude still around 102, the 10-year just a hair above 5%.

41:15The decision, the analysis, and the press conference is next.

41:24All right, welcome back. It is a crucial hour ahead for the markets and your money. And welcome or welcome back to our special Fed coverage. We are live in Washington, D.C. I'm Brian Sullivan with Kelly Evans. We are just a couple of minutes away now from the Federal Reserve's decision on rates. The markets, they're overwhelmingly pricing. Kelly, at the Fed, we'll make no move today. Correct. A big difference from July, by the way. We're going to talk more about that. July, they didn't move. The long end revolted. You ultimately had Treasury intervention. As Joe LaVordia pointed out last hour, the odds then were about one in three they might hike.

41:54Today, it's like 8%. We'll be watching for Warsh's guidance on inflation, the committee's next move. Stocks are pretty steady. Not much change today until this event. 502, you can write that down as the 10-year yield right now. The S &P right now is up about two-tenths of a percent. Then, of course, don't want to overlook this, and it's probably all related. The next test for the AI trade is coming up when the market closes. Alphabet and Microsoft are reporting in just two hours. That will also be essential today. Alphabet drifting higher, Microsoft trading off slightly. Yep, and I'm going to be speaking exclusively with Treasury Secretary Scott Bessett at 4 p.m.

42:27Eastern time about the Fed, about AI, about all that stuff. But right now, let's talk about the Fed and your money. Welcome in our new all-star, well, new-ish. New-ish. New-ish all-star panel because we're bringing back some from the 1 p.m. panel as well. Joining us now on set, David Kelly of JPMorgan Asset Management, Jeff Blazek of Neuberger. You saw him in the previous hour. And Francis Donald of RBC Capital Markets. Francis, I'll start with you. We don't expect a rate hike today. I get it. But what would you be watching most closely in this Fed rate decision? Brian, today's not about today.

43:01Today is about December and maybe a little bit about the existential crisis of central banks facing supply shocks. We're not going to get forward guidance, but we may get some dissents. We'll see some tone and some body language. This is all about how do we set up for the rate hikes coming ahead.

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44:21I know there's two minutes to steam. Thank you, guys. Jeff, jump in here. Well, I agree with what Francis just said. This is December to remember. That will be the more notable one. This is probably going to be no news is good news in October. But I think the press conference will also be very informative, talking a bit about the dissents as well. That's right. I mean, I think that one thing is, will it be unanimous? Because that, to me, would be a sign that the Fed, again, is refocused on its independence and wants to present a united front. The other thing is, how do you explain in a tactful way that the reason you're up moving rates is because you've got an election six days away?

44:56And you're going to be calling us on med because she doesn't want to hear that explanation. And they don't want to say that. But the truth, look, not every data point is a number. And the midterm elections are a big data point when it comes to tariff policy, when it comes to fiscal policy, when it comes to foreign policy. AI policy. And so all of it. So why not wait to see how the balance of power, what the balance of power is after the election? Because that will give you more information. And so there's no real necessity to move right now. So let's wait and see until we get some more information.

45:24OK, Francis, I feel like there's three things that are at play, though. We got the Federal Reserve. We got inflation. I get that. But we also have this AI thing. You might have heard about that. Oh, and by the way, energy, oil back above it. So you got three big things, oil, AI and inflation. How do they all kind of rank? Well, don't forget as well that we got some softer employment data in there, and that's going to give the Fed a little bit of time. I mean, inflation, Brian, is moving in the wrong direction. It is broadening. There are signs that there is more inflation ahead. This is going to weigh a lot on how much time Fed Chair Warsh has here to create this patience.

45:58I think he's going to have to explain why they're holding when inflation has gone in the wrong direction since they started saying they had to hike. You've been listening to The Exchange. Make sure you're subscribed to get each episode every day, same time, same place.