UBS: The Fed Has Never Hiked in October Before an Election — And Likely Won’t This Time

UBS: The Fed Has Never Hiked in October Before an Election — And Likely Won’t This Time

TREE NEWS reports: Markets are pricing roughly a 69% probability of a Federal Reserve rate hike at the October 28 meeting, a bet that has intensified as the US-Iran conflict drives oil prices sharply higher and Treasury yields climb to near two-decade highs. But UBS analysts argue this expectation significantly overstates the Fed’s willingness to act just days before the November midterm elections. Since 1990, the central bank has never raised rates at an October meeting in an election year.

The Historical Record: 35 Years Without an October Election-Year Hike

UBS analyst Simon Penn noted in a Monday report that while the Fed publicly insists its decisions are entirely independent of political considerations, exercising restraint immediately before major political events has been standard practice. Over the past 35 years, the Fed raised rates at a September meeting ahead of a November election only three times — in 2004, 2018, and 2022 — and never in October.

Each of those three September hikes had distinct circumstances. The 2022 move was the most aggressive, a 75-basis-point increase that represented the largest pre-election adjustment in modern history as the Fed battled post-pandemic inflation. The 2004 hike was part of a gradual tightening cycle launched in June that year and ran through the entire election season. The 2018 increase proceeded despite open pressure from the Trump administration to pause. In every other election year — including 1992, 1996, 2000, 2008, 2012, 2016, 2020, and 2024 — the Fed refrained from hiking in either September or October.

Repricing the Rate Path

Penn recommends that traders fade October hike expectations and reduce cumulative rate-hike pricing from the current 91 basis points to 75 basis points over the next year. Removing the October hike does not mean markets should price a 50-basis-point move in December, he cautioned. Current December pricing of roughly 38 basis points should normalize to a full 25 basis points, with the removed October pricing distributed across subsequent meetings — approximately 12 basis points to January and 18 basis points to March. On a trading basis, Penn suggests shorting the long end of the curve.

Yield Shock Has Already Crushed Equity Valuations

The equity market implications are equally significant. UBS equity strategist Keith Parker observed that the sharp rise in Treasury yields has triggered a substantial valuation reset. Since last November, as the 10-year Treasury yield climbed roughly 100 basis points, the S&P 500’s forward twelve-month price-to-earnings ratio has fallen 17% — a compression comparable to recession scenarios and on par with the 1994 tightening cycle.

History shows that when rates stabilize without aggressive tightening — defined as less than 100 basis points of hikes in a year — the S&P 500 has typically delivered double-digit returns over the following twelve months. In full tightening cycles exceeding 100 basis points, equity returns have historically been flat to negative. Parker argues that equities currently have more upside elasticity to falling yields than downside risk from further yield increases, recommending investors position for a sustained higher-rate environment while capturing asymmetric opportunities if yields retreat. On sector allocation, semiconductors, pharmaceuticals, oil refining, and diversified banks score well on combined metrics and exhibit relatively low rate sensitivity.

Energy Shock and Inflation: The Central Tension

The core market conflict centers on whether elevated energy prices will keep inflation sticky and force the Fed to extend its tightening cycle. The US-Iran conflict has pushed Brent crude to $106 per barrel, while 10-year and 30-year Treasury yields have reached their highest levels since 2007 and 2004, respectively. Upcoming US economic data will test these concerns: strong growth data would give the Fed more room to tighten, while hotter-than-expected inflation would reinforce the case for further hikes.

Goldman Sachs separately noted that when the 10-year Treasury yield rises about 30 basis points within two weeks or roughly 50 basis points within a month, equities typically encounter significant resistance. The yield has already climbed 28 basis points since September 9 and 37 basis points since August 21, approaching those historical thresholds.

Key Takeaways for Investors

• Fade October hike bets: Historical precedent strongly suggests the Fed will hold at the October 28 meeting, making current market pricing vulnerable to a repricing that could benefit duration-sensitive assets.
• Watch the yield threshold: The 10-year Treasury is nearing levels that historically trigger equity resistance. A break above 30 basis points in two weeks or 50 basis points in a month could pressure stocks further.
• Position for asymmetric yield outcomes: Equity valuations have already absorbed a recession-like compression. If yields stabilize or fall, the rebound potential is substantial.
• Favor low rate-sensitivity sectors: Semiconductors, pharmaceuticals, refining, and diversified banks offer attractive risk-reward in a higher-for-longer rate environment.
• Monitor energy and geopolitics: The path of oil prices and the US-Iran conflict will be decisive for inflation expectations and, by extension, the Fed’s room to maneuver.